Today, many Americans are hard-pressed to set aside enough savings for a timely or comfortable retirement. The factors most-often cited as driving the coming "retirement crisis" include longer life expectancies, rising health care costs and stagnant incomes.
The African-American community faces these same challenges plus other economic headwinds, but with larger hurdles to overcome to secure a comfortable retirement. Nowhere is this more apparent than in America's defined contribution system, where African-Americans are confronted by the following:
-
Lower overall use of employer-sponsored plans. In 2013, only 41% of African-American families had retirement savings accounts, vs. 65% of white, non-Hispanic families.
-
Lower levels of plan enrollment and contribution rates. African-American had a 68% average plan enrollment vs. 79% for white participants, and 22.2% lower contribution rates vs. white participants.
-
Unfavorable demographic, economic and work-related factors. Compared against their white counterparts, the average African-American plan participant is 14% younger, has 10% less job tenure, earns 30% lower average salary and has 28.4% higher job turnover.
These factors, in turn, drive the following adverse retirement outcomes for African-Americans:
-
Significantly lower average retirement savings balances than their white counterparts. For participants with income less than $60,000, African-Americans have 34.1% lower average balances. For income levels below $30,000, this figure climbs to 48.6%.
-
Dramatically higher cash-out rates. In general, African-American plan participants are 61.5% more-likely to cash-out their retirement savings, vs. white participants. Immediately following separation, and for income levels less than $20,000, this figure soars to 134%.
Range of solutions
Overcoming the African-American retirement crisis requires actionable solutions that collectively improve the situation for American retirement savers. Here are some to consider:
1. Improve access to workplace retirement savings plans.
Recommended For You
This was the #1 recommendation of the Bipartisan Policy Center's Commission on Retirement Security and Personal Savings, when they issued "Securing Our Financial Future: Report of the Commission on Retirement Security and Personal Savings" in June 2016.
It seems clear that any solution that increases access to retirement savings plans for all Americans will be particularly beneficial for prospective African-American plan participants
2. Reduce cash-out leakage and consolidate retirement savings within the defined contribution plan system.
Supported by numerous studies, including the Bipartisan Policy Center, EBRI, the GAO, large recordkeeper cash-out studies and the Auto Portability Simulation (APS) model, reducing cash-out leakage is the simplest, easiest and best path to preserving and incubating retirement savings.
3. Increase minority enrollment through further adoption of auto-enrollment features.
Multiple studies have shown that adoption of automatic enrollment features disproportionately boost African-American 401(k) participation rates.Unfortunately, in recent years the rate of growth of auto-enrollment seems to have stalled, and industries with high levels of turnover, as well as small businesses have been particularly resistant to adopting the feature.
How Auto Portability Can Help
Auto-portability can help solve the problem. Here's why:
-
By automatically moving small-balance retirement savings forward when participants change jobs, widespread adoption of auto-portability will act directly to preserve, incubate and grow the retirement savings of all small-balance 401(k) participants, who are disproportionately represented by African-Americans.
The Auto Portability Simulation suggests that portability, when applied to the sub-$5,000 balance segment, could result in an additional $151 billion in retirement savings for African-Americans, over the next generation of savers.
Solving the "small account problem" for high-turnover industries and small businesses, auto- portability will indirectly support further adoption of auto-enrollment in these sectors. Where the auto-enrollment feature is present, African-American enrollment rises to 94%, from 57% without auto-enrollment.
Finally, nowhere is the beneficial effect of auto-portability more apparent than for individual savers. In a hypothetical scenario, a 25-year old African-American female who prevents just $17,622 in cash-outs early in her career could generate an additional $151,354 in retirement savings, and another $193,612 in retirement income.
Learn more
Take a look at the detailed issue analysis "The African-American Retirement Crisis: How Auto Portability Will Help." And learn more about auto-portability.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more inforrmation visit Asset & Logo Licensing.
