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401(k) Plans in Living Color: A Study of 401(k) Savings Disparities Across Racial and Ethnic Groups

Nearly half of all retired Americans today have little or no money saved. The vast majority have far less than what they will need, and are not saving and investing sufficiently to make up for the shortfall. American workers must now grapple with many questions as they consider retirement: Have I saved enough? How much will inflation erode my savings? Could I outlive my money?

401(k) plans are the primary retirement vehicle for two-thirds of large employers. When analyzing 401(k) plan participation by race and ethnicity, quantifiable differences are evident.

401(k) Plans in Living Color: A Study of 401(k) Disparities Across Racial and Ethnic Groups is both groundbreaking and important. This study — the largest, most comprehensive examination of the 401(k) savings behavior of African-American, Hispanic, Asian, and white employees — was conducted by Ariel Education Initiative, the nonprofit affiliate of Ariel Investments, and Hewitt Associates, along with the Chicago Urban League, the Joint Center for Political and Economic Studies, the National Council of La Raza, the National Urban League, and The Raben Group. The study was funded with a grant from The Rockefeller Foundation.

The findings in this study are based on year-end 2007 information collected from nearly 3 million eligible employees working for 57 of the largest U.S. companies across a variety of industries and sectors. The data, collected by Hewitt Associates, includes race, ethnicity, gender, salary, age, job tenure, 401(k) balances, and other account information. It analyzes savings and participation rates, stock exposure, loans and hardship withdrawals, and account balance by race and ethnicity.

The results of the study reveal that — even after controlling for factors such as age, salary, and job tenure — quantifiable differences are clear across race and ethnicity in how successfully 401(k) plans are used. In general, we found that African-American and Hispanic workers have lower participation rates and contribute less to their 401(k) plans than their white and Asian counterparts. They are also more likely to have a loan and/or take a hardship withdrawal. As a result, the 401(k) account balances for these workers are negatively impacted and chances for a comfortable retirement significantly compromised.

The project collaborators strongly believe swift action needs to be taken to address the disparities and potential lack of retirement preparedness among many people of color. Our call to action is broad-based — covering employers, government, and individuals — and can ultimately benefit all plan participants, regardless of race, ethnicity, or gender. As part of recognizing the problem and finding solutions, the study outlines five recommendations:

1. Design 401(k) plans in a way that benefits a broad, diverse employee base.
2. Provide the necessary communication, education, and resources to help individuals make wise choices.
3. Encourage employers to voluntarily collect and report their 401(k) plan data by race and ethnicity of participants.
4. Modify loan requirements in 401(k) plans to decrease the likelihood of default when an employee terminates employment.
5. Provide financial education as a mandated component of both public and private school curricula at all levels, from kindergarten through secondary school.

Saving for retirement in a 401(k) starts with a decision to act that then becomes a series of actions — some seemingly small — that can have a large, positive impact over the long term. Racial and ethnic disparities in 401(k) plans must be addressed in the same way, by starting with a decision to act and then following through with a series of measures, both large and small, over the subsequent years and perhaps decades. By shedding light on the inequalities in 401(k) outcomes, it is our hope that this research will provide the initial impetus for meaningful action.

Read a summary of the study findings.

Podcast Interview with Mellody Hobson of Ariel Investments

Hewitt's One-to-One podcast series features an interview with Mellody Hobson, nationally-recognized voice on financial literacy and investor education. Hobson shares her perspectives on retirement preparedness and the new Ariel/Hewitt research on 401(k) disparities across racial and ethnic groups.

Listen to the One-to-One with Mellody Hobson.