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Getting Minorities to Buy In on Retirement

Experts agree that automatically enrolling all participants and annually increasing the pretax employee salary contribution is crucial for getting minorities to participate in retirement plans.

February 13, 2012
Related Topics: Top Stories - Frontpage, Retirement/Pensions, Retirement Planning, Benefits
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As minorities play a larger role in the U.S. workforce, studies are showing that African Americans and Latinos are not saving for retirement, even when they are given the opportunity to participate in a 401(k) plan.

In 2008, only 28 percent of Latinos were enrolled in defined contribution plans offered at their workplace, according to data from the Employee Benefit Research Institute. African Americans participated 41 percent of the time while half of white workers were enrolled in plans, the Washington, D.C.-based research group reported.

While this is EBRI's most recent data available, Mellody Hobson, an expert on racial and ethnic savings disparities and president of Ariel Investments in Chicago, says the situation hasn't improved.

"We have been in a crisis mode for many years," Hobson says. "Minorities are not preparing for retirement."

What can companies do to not only get minorities to enroll in plans, but also to save enough for retirement? Experts agree that automatically enrolling all participants and annually increasing the pretax employee salary contribution is crucial.

"Given all the prior research on [participant] inertia and participant propensity to just stay put [at the original default rate], these features can work," says Cyndy Pagliaro, senior research analyst at Vanguard Investment Group in Valley Forge, Pennsylvania. "We feel minorities respond well to automatic plan design."

Vanguard studied seven large defined contribution plans with more than 250,000 active plan participants in 2010, and found 94 percent of African Americans participated under automatic enrollment vs. 57 percent with voluntary enrollment. Automatically enrolled Latinos participated 95 percent of the time, while 67 percent participated on their own.

By comparison, 95 percent of white workers and 98 percent of Asian workers participated when automatically enrolled, while 73 percent of white workers and 90 percent of Asian workers voluntarily enrolled themselves in the 401(k) plan. In using automatic features for 401(k) plans, "we are getting to people who wouldn't make the choice to save on their own," Pagliaro says.

Adrian Castresana, 33, agrees. As a first-generation Mexican American working as an account coordinator for GMR Marketing in New Berlin, Wisconsin, Castresana says he wouldn't have enrolled in the company 401(k) plan on his own. Last August he was automatically enrolled at 2 percent of his salary (which was matched by GMR at 2 percent), and so far he has saved about $4,500.

"It's not a substantial amount, but I'm getting there," Castresana says, adding he also saves in two individual retirement accounts.

Plan sponsors need to do the tough work and look at the demographic makeup of their participant base, industry experts agree. Sometimes a high participation percentage doesn't accurately reflect what is really going on with minority groups.

"White participation numbers are masking the problem," Hobson says, adding that a joint study on minority savings by Ariel and consulting firm Aon Hewitt is expected out sometime during the first quarter of this year. "If companies saw the disparity among minority groups, I think it would lead to very creative solutions to narrow the savings gap."

AGL Resources' benefits committee knew workers' participation and contribution rates in the company 401(k) plan were mediocre, but when it broke down overall participation and contribution numbers by race, it didn't like the results.

The Atlanta-based natural gas company had 70 percent of its 2,300 eligible workers participating in its 401(k) plan. About 76 percent of its white workforce was participating, while only 55 percent of African Americans and 46 percent of Latinos were taking advantage of the plan. And in looking at contributions, white workers contributed an average of 6 percent while African Americans and Latinos were only putting in 3 percent.

"I would like to see 100 percent participation. I think everyone should be saving for retirement," says Chasity Miller, AGL's managing director of compensation and benefits.

Starting this year, new employees will be automatically enrolled in the company's 401(k) plan at 3 percent of pay into a target-date fund. Each year, employee contributions will automatically escalate 1 percent to a ceiling of 8 percent of pay. Meanwhile, AGL will contribute 65 cents for every dollar of employee contributions, up to 8 percent.

"We want people to see that if they're not saving at least 8 percent [of pay], they are leaving money on the table," Miller says.

Complementing auto enrollment with an annual increase in salary deferral is critical, says Pam Hess, director of retirement research at Aon Hewitt. Hess says a good starting point would be 4 percent of pay and automatically escalating the amount up to 10 percent.

"Employee contribution rates are far too low," says Hess, adding that many employers default employees at 3 percent of pay and never increase the amount. "It's not going to get people where they need to be long term."

AGL's Miller says the company does not plan to back sweep, or automatically re-enroll current employees into the plan. The company intends to use its affinity groups to talk about the new contribution structure in a way that resonates with each group.

"It's all about how we communicate," Miller says. "There is no one-size-fits-all approach. We are all different people, and there is a need to communicate in different ways."

Still, Hobson says she worries about the millions of minority workers who don't have access to any company-sponsored retirement plan. President Barack Obama has pushed the idea of an automatic individual retirement account, where workers would automatically get a portion of their salary deferred to such a plan, but no legislation has been passed. Hobson thinks forcing this is tough, but the issue needs attention.

"It's so complicated, but the federal government needs to be more aggressive and creative in offering retirement plans for all Americans," Hobson says.

Patty Kujawa is a freelance writer based in Milwaukee. To comment, email editors@workforce.com.

Workforce Management, February 2012, pgs. 28, 30 -- Subscribe Now!

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