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The Racial Retirement Gap
When it comes to effectively closing the gap between the amounts black employees and their white counterparts are putting aside for retirement, it may take far more than simply holding a few investment-education seminars or ensuring that the slick brochures from retirement-plan administrators feature more diverse couples on their pages. In fact, the reasons for the disparity may have as much to do with culture and history as with a lack of knowledge about investing. "African-Americans tend to have a much more skeptical view of the stock market than whites," says Andres Tapia, chief diversity officer at Lincolnshire, Ill.-based Hewitt Associates. "They do not have a great deal of trust in the financial system in general. For generations, they've been disenfranchised by that system, and now these financial institutions are saying 'Hey, we want your money.' " Blacks also tend to put less emphasis on saving for retirement versus saving for their kids' educations or buying a house, he says. The 11th annual Black Investor Survey, co-sponsored by Chicago-based Ariel Investments and San Francisco-based Charles Schwab, found that even when white employees and black employees have similar incomes and equal access to employer-sponsored defined-contribution plans, whites tend to contribute twice as much to their plans and to have account balances that are twice as large. The study, which surveyed 503 black employees and 506 white employees with household incomes of at least $50,000, found that roughly 90 percent of each group had access to DC plans and, of those groups, 90 percent made regular contributions to their plans. However, the median monthly amount that blacks contributed to a 401(k) plan was $169, while the median monthly contribution for whites was about 50-percent higher, at $249 per month. The survey also found that the median total household savings for retirement among blacks was $53,000, compared to $114,000 for whites. "We African-Americans are enrolling in defined-contribution plans at the same rate as our white counterparts -- the difference is, when we enroll, we tend to choose different investments and to contribute less," says Mellody Hobson, president of Ariel Investments. Research by Ariel has revealed that the stock market and investing tend to be discussed less in black households than in white households, she says. "Lack of knowledge about the stock market, not quite having the facts right -- these can be big hurdles" to investing for retirement. Black workers also tend to be more cautious about investing because, in many cases, they may be the first generation in their family to be earning a middle- or upper-middle-class income, says Hobson. "The thought of losing what they've gained is terrifying," she says, adding that many blacks tend to equate the stock market with gambling. Focus groups conducted by Hewitt Associates have revealed that when whites are asked what they're saving for in the long term, they choose retirement by a large margin, while blacks tend to cite buying a home and saving for their children's education as Nos. 1 and 2, with retirement a distant third, says Tapia. Indeed, although the Ariel study found that 45 percent of blacks under the age of 50 (compared to 26 percent of whites) say they want to retire by age 60, they are half as likely to cite retirement as their most important goal when saving and investing. Financial and investment education should take note of this by addressing the different investment vehicles available for saving for college and retirement, says Tapia. HR leaders should also understand that for black --and Hispanic -- employees, having someone from a similar ethnic background discuss savings and investment strategies can be important, he says. One expert suggests that companies take a holistic approach by offering employees seminars on a variety of personal finance topics, ranging from insurance to home ownership, managing credit and budgeting, as well as retirement planning. "If you get in a situation where you have a bad credit score, for example, you'll end up paying a higher interest rate on your car loan and consequently will have less money to set aside for retirement," says Theodore Daniels, president and CEO of the Society for Financial Education and Professional Development, an Arlington, Va.-based nonprofit firm that offers on-site financial education courses to employers nationwide. Even retirement brochures are a factor, says Tapia. "Picture a typical 401(k) brochure -- it depicts an older white couple walking hand-in-hand down a beach, a golden retriever at their side," he says. "Some might say, 'Well, put a black couple in there instead,' but that still won't speak to the African-American view of retirement." That view, he says, tends to be less about playing golf or walking down a beach at sunset than it is about philanthropy and volunteering. "When we ask African-Americans about their retirement, they talk about being able to take another job where they're giving back," he says. "This is huge, especially among successful African-Americans -- it's a sign of success that says, 'I have enough to give back to my community." Hewitt's research also shows that DC plans with features such as automatic enrollment are especially effective for black and Latino employees, as they tend to opt-out of these plans at a lower rate than whites, says Tapia. Hewitt Associates and Ariel are in the midst of conducting an in-depth analysis of why African-Americans -- and Latinos and women -- tend to contribute less to their retirement plans than white men. The study, funded by the Rockefeller Foundation, will examine the defined-contribution plans at 60 Fortune 500 companies to determine participation rates, contribution rates and account balances by race and gender. The results will be announced early next year. "We think the results will be extraordinarily enlightening to all employers," says Hobson.
November 13, 2008 Copyright 2008© LRP Publications |
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