Have the conversation: 401(k) plan changes can close the racial retirement savings gap

A recent webinar from Morningstar, the financial services company, recently hosted a webinar on disparities in outcomes in the defined-contribution (DC) retirement savings world.

The seminar examined the findings of a new study by the Morningstar Center for Retirement and Policy Studies, which found significant race and gender disparities among workers with DC plans.

“The defined-contribution system, vital for American retirement security, leaves Black, Hispanic, and female workers with lower average account balances even after controlling for salary and tenure,” the study concluded. “To make retirement savings plans effective tools for savings and wealth creation for all workers who take advantage of the plan, there is a need to better understand the specific drivers of the disparate savings outcomes the defined-contribution retirement savings system is currently producing for workers from different racial and gender groups.”

The beginning of understanding DC disparities

The webinar, called “Initial Findings from the Collaborative for Equitable Retirement Savings” made the case that although clear disparities were shown in the data, the study of these issues is just beginning, and much more data needs to be collected and analyzed.

The groups that worked on the project included The Collaborative for Equitable Retirement Savings, or CFERS, created by the Defined Contribution Institutional Investment Association, or DCIIA, the Aspen Institute Financial Security Program, and Morningstar Retirement

Pamela Hess, executive director of DCIIA Retirement Research Center, said that leaders in the industry understand that there is a need for more data in this area. “We joined forces to bring retirement leaders together across the system, to better understand how retirement savings is working for workers, focusing on race and gender, which haven’t’ been studied well to date,” she said. “It really is about something that is ongoing, longitudinal … and something we’re going to be seeing for years to come.”

Jack VanDerhei, director of retirement studies with the Morningstar Center for Retirement and Policy Studies, said much of the research in the past didn’t get into essential detail about race and gender. This study worked with employers to get that kind of information while still avoiding any personal information that could identify individual workers.

“Some of the conventual wisdom… people just say this can all be explained by differences in salary,” he said during the webinar. “We did a very detailed analysis to show whether or that’s true: punchline, it’s not.”

Findings: Racial and gender disparities in retirement savings

The report outlined several areas where race and gender seemed to be linked with worse outcomes in retirement savings.

“Black and Hispanic workers have much less in retirement savings than their white counterparts, with white workers accumulating hundreds of thousands more in retirement savings on average by retirement,” the report said. “These differences in account balances are still significant even when controlling for income and tenure.”

In addition, the data showed that Black and Hispanic females contribute lower percentages of salaries to retirement savings—even when controlling for age, salary, tenure, and plan design variables.

Part of the problem could be early withdrawals from retirement accounts; the study found that Black and Hispanic workers are more likely to make those withdrawals than their White counterparts.

“This is not an education issue primarily. These folks know that they’re missing out on [savings] compounding,” said Yemi Rose, founder and CEO at OfColor. “The reality is that employees of color struggle with the racial wealth gap every day, and … it makes us more vulnerable to economic shock and we have to pull funds more frequently.”

He said the new findings provide more concrete evidence of disparities; it builds on studies done before and allows people in the industry to have a more data-driven conversation. He noted the research overall suggests that people of color are contributing to retirement accounts at lower rates and are more likely to take early withdrawals. “I think the obvious answer is that there’s a ripple effect from history that folks are still dealing with today, and we need to do everything possible to ensure that we are building systems and plans that support the most vulnerable among us.”

New ideas, better outcomes

The researchers plan to next study the many ideas that have been offered to try and address the racial and gender gaps in retirement savings.

The panelists agreed that there are strong incentives for employers and the retirement savings industry to address these gaps.

Robin Diamonte, chief investment officer at RTX, said that the research could lead to very practical, productive steps that companies could take in order to improve recruitment and retention for their firms. “Here at RTX we know that when employees are financially secure, or at least stable, when they’re at a place where they can spend, save, and potentially give, then they’re more focused on work, and their energy is going to be directed on their day job, as opposed to really worrying about financial security,” she said.

Related: Citibank can offer 401(k) plan sponsors a roadmap to help close the ‘racial wealth gap’

As an example, she pointed to situations where employees are at retirement age but don’t feel financially secure enough yet to retire. She referred to the global financial crisis, when people were unsure of the future and just tried to hang on to their jobs. “Their output, which they would readily admit, was much less than in the past, because they were in retirement mode, and could not retire,” Diamonte said. “We do not want to have a group of employees who want to retire and are at the age to retire, but don’t have the financial security to do so. That’s not good for the business—or for health care costs.”

Rose said that the research is proving valuable data and he hoped it would continue to give people in the industry useful numbers and measurables to work with. “I’m hoping that as we start to make this more of a data-based conversation—these conversations about race, and money, and work can be fraught and feel a little bit tenuous,” he said. “But I think the more we see those outcomes, the more we’re seeing that those aren’t matching the values that we have internally. I hope we also see the connection between secure and productive employees and really solid customer outcomes …

“I hope it also leads to more frank conversations about race,” he said. “You know, folks of color are not just randomly deciding to take hardship withdrawals, so let’s explore how best to reach these employees. Let’s lean into cultural relevance.”