Why Can't Minorities Save More for Retirement?

Posted by: Lauren Young on July 7, 2009

Why can’t minorities—particularly those who are professionals—save more for retirement?

New research out from the Ariel Education Initiative, Hewitt Associates and several other partners shows 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 counterparts—a $68,000 deficit that worries retirement experts, notes my colleague Nanette Byrnes in BusinessWeek’s Management IQ blog. Overall, lower-income blacks and Hispanics also lag their when it comes to saving for retirement. Moreover, nearly two of every five African-American workers and almost a third of Hispanic workers borrowed from their retirement accounts compared to just one in five white workers.

The data comes from an extensive analysis of nearly 3 million employees who participate in a 401(k) across 57 large companies in the U.S. Hewitt has been aggregating this data for many months, so it doesn’t even include the impact on retirement savings after the recession hit America the hardest in the past year.

Back in January, I profiled McDonald’s (MCD) where nearly 20% of the 6,700 store managers are black. Thanks to the work of John Rogers, founder of Ariel and a McDonald’s board member, McDonald’s is one of the few companies trying to close the savings gap between its African-American and Latino workers in comparison to their white and Asian counterparts.

What fascinates me the most are the cultural reasons why minorities don’t save more. African Americans, for example, do not trust the financial system because it has excluded them for generations. They consistently put home ownership and college ahead of retirement goals. In the black professional community, owning a home and educating children are top priorities, particularly if you are the first person in your family to do it.

Saving for the future is controversial. “If your Mama lives with you—and others in your extended community are struggling to get by—putting aside money that you can’t touch for the next 15 to 20 years feels selfish and inappropriate,” according to a quote I have in my article from Andreas Tapia, chief diversity officer at Hewitt Associates, who led the data-mining project. (Hewitt also helped McDonald’s redesign its 401(k) plan.)

The story is similar in the Latino community, although the familial bonds tend to be even more intense.

To close the retirement savings gap, McDonald’s is attacking on many fronts. It is pushing financial literacy on employees, and it is using grassroots employee networking to spread the retirement savings gospel.

But McDonald’s is just one company, and my sources say it is light years ahead of its competitors as well as the rest of Corporate America on investing education. Let’s hope this will be a wake up call to other companies to get workers to save more for the future. (For more information on saving for retirement, check out BusinessWeek’s special issue on Rethinking Retirement.)

Reader Comments

Max

July 7, 2009 6:03 PM

Minorities tend to get higher interest rates relative to white counterparts, lowering the income available to put towards savings. That alone may explain the savings difference between even the more affluent ($120K/yr) wage earners.

kelly p

July 7, 2009 7:43 PM

Discipline and fatalism.

DanTe

July 7, 2009 8:16 PM

So how come Asians are always lumped in with the Whites when you talk about how minorities are always "disadvantaged"? Probably because including such a small minority group as American Asians would skewer all your distorted statistics with reality. Especially when it comes to education, home ownership, savings rate, crime rate, and all the other stats detailing how a minority is "disadvantaged".

skyking

July 7, 2009 9:26 PM

I am a minority and I earn over $120,000 a year and my 401K has less than $100k in it. My other investments total more than $3mm (stocks, real estate, mutual funds, bonds, three IRAs, and an old defined benefit account). 401ks sort of suck - even minorities know that and many have other investment strategies and assets, not just 401ks.

Tony

July 7, 2009 9:49 PM

Well, i believe there are several reasons:
1) Most minorities have a smaller cushion of inherited assets. The normal dips of life take a larger toll on their ability to save and they don't have those inherited assets working for them.
2) Many who have "made it" are supporting numerous other family members. It's not uncommon for a minority professional to be supporting a mother, mother in law, a couple of neices/nephews in addition to funding college for their kids, and maintaining everything else.
3) Some minorities haven't had the chance to learn much about finances and investing. They are frequently the first in their family to do something so there is no passed down knowledge about investing.

Strategery

July 7, 2009 11:40 PM

I think trust of the financial industry is a big one, especially for anyone that has a credit card account. If this industry doesn't start treating their customers better, with retail banking and retirement accounts, they will face another generation like the depression era where people hid money in their mattresses. Statistically, minorities have a lower life expectancy, so maybe they are spending for today instead of saving for a retirement they might not have? And, if you have never had money (regardless of race) then you might be inclined to spend some of it when you do have money.

candide

July 8, 2009 8:36 AM

Not all minorities are the same. Asians tend to save a great deal. When it comes to blacks and some Hispanics the problem is the lack of a Super Ego. They want to enjoy now rather than save for later.

Oklahoma

July 8, 2009 8:55 AM

DanTe has an excellent point - are Asian Americans not a minority just as blacks and hispanics? Do they not also have mothers, mother-in-laws, and children to care for?

Sue

July 8, 2009 11:45 AM

This whole article is controversial. Too many things can affect it. (1) 120k plus earners probably put most minorities on the lower end of the spectrum so thus, they have less to save anyway (2) historically, financial literacy education lacks in our community, it's not generally part of our oral tradition to communicate our financial knowledge (3) how many urban professionals by sheer numbers alone are working at top companies with solid 401k plans and (4) this is just the wrong time to do this comparison... in a failing economy when most people are being laid off and have to withdraw money from their retirement plan to even survive... and I’m sure the unemployment rate is higher for one demographic than another. Let's be real

Lauren Young

July 8, 2009 1:06 PM

Thanks everyone for your comments!

Sue, you raise some good points about the financial education as well as the number of minorities in management/professional jobs. Keep in mind, however, that this data precedes the recession.

Tony: I never even considered inherited wealth before, but I think that is another smart argument for the savings gap.

I'm always wary of stereotypes, but there is a modicum of truth about cultural distinctions.

I plan to talk to the folks at Hewitt who worked on this study in the next few weeks to get a little deeper into the data. Stay tuned.--Lauren Young, BusinessWeek

Rick James

July 8, 2009 1:58 PM

My president is black, my Lambo's blue
And I'll be goddamned if my rims ain't too
My momma ain't at home, and daddy's still in jail
Tryna make a plate, anybody seen the scale?
My president is black, my Lambo's blue
And I'll be goddamned if my rims ain't too
My money's light green and my Jordans light grey
And they love to see white, now how much you tryna pay?
Let's go!

Sheila

July 25, 2009 10:46 AM

Everyone should read the comment made by Tony. No excuses, no finger pointing, just the reality.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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