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Regardless of age or income African-Americans and Hispanic workers contribute less often, and less money, to a 401k than white and Asian-Americans, according to a just-published study. Among the surprising findings: that African-American employees who earn $120,000 or more have saved $154,902 in their 401(k)s on average, versus $223,408 for their white counterpart—a $68,000 deficit that worries retirement experts.
“Without a significant effort to improve savings and investing behaviors, African-American and Hispanic workers are in danger of retiring into poverty,” says Mellody Hobson, president of Ariel Investments, an investment firm that sponsored the study along with benefit consultants Hewitt Associates.
Some companies have done a good job of engaging minority workers in retirement savings, but on the whole, while 77% of white Americans contribute to their employer’s 401(k), this study found only 66% of African Americans do, and just 65% of Hispanics participate. Whites also contribute more, an average of 7.9% of their income, compared to 6.0% for African Americans. African Americans are also less likely to invest in equities, and more likely to take out loans against their retirement savings or make hardship withdrawals.
And the sharp disparities are likely even worse today, with the economy well into recession. This study was conducted through December 2007, before the worst of the economic slump hit. The data, which includes information for nearly 3 million employees of 57 large U.S. corporations, “doesn’t even incorporate the financial crisis,” notes Hobson. “You’re looking at numbers that shocked us even before that.” (For more on the challenges of planning for retirement in the downturn here’s a link to our current special report.)
The high rate of borrowing from 401k worries Barbara Hogg, a principal at Hewitt and co-leader of the study, because that money is in danger of never getting back into the employee’s account, especially if they lose their job and are forced to quickly repay it or bear financial penalties. The study found that 39% of African-American workers had taken a loan, versus just 16% of their Asian American counterparts. And in the current downturn, minorities have been losing jobs at a faster clip than white Americans, notes Hobson. “It puts them on shaky financial footing,” she says. ( In a separate study, Hewitt found that between 2007 and 2008 hardship withdrawals from 401(k) accounts rose 20%.)
On the other hand, many minorities report they are willing to save because they know they can get access to the money through loans or withdrawals if they do have an emergency.
Fixing this kind of inequity might be hard to do. But the authors say mandating financial education and communicating better about saving for retirement would be two helpful steps. Hogg notes that companies and investment managers have traditionally touted 401(k)s as a means to financial empowerment and individual success. “Other cultures may be less cultures of individualism and more of a community. They may need motivation beyond individualistic success.”
Whatever the marketing message, both Hogg and Hobson agree that students have to hear about the value of retirement savings earlier. “Today in High School you can elect to take woodshop or auto mechanics and not (have the option to take) a really great class on money and investing,” notes Hobson. “ The odds people are cleaning their own carburetors are declining, but making good informed money choices not only affects your life but future generations.”
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