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Minority Employees Trail in Retirement Plan Participation

The lowest participation is by nonnative-born Hispanic workers. Employers can tackle the problem of lower minority-worker participation through automatic enrollment, automatic escalation of deferral rates and adding more sophisticated financial education.

February 24, 2010

Mauricio Fernandez has a great job as an account supervisor with GMR Marketing in San Francisco. His wife works as a dentist in Fort Lauderdale, Florida, but neither of these professionals has saved any money for retirement. Not a dime.

Fernandez, 36, says he opted out of his company’s 401(k) plan because he needs the cash. To date, repaying tuition loans and sending financial support to his aging parents back in Colombia have taken priority, Fernandez says.

“It has been tough for me,” Fernandez says. “Every dollar I have been able to save has gone to my family in Colombia.”

A recent study by the Employee Benefit Research Institute showed many minority workers share Fernandez’s situation. They aren’t enrolling in their companies’ retirement plans.

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Of the 73.6 million people ages 21 to 64 working for an employer that sponsored a retirement plan in 2008, about 60.4 million, or 46 percent, participated in either a defined-benefit or defined-contribution plan, the Washington-based research group reported.

But here are the striking statistics: Only 28 percent of Hispanics were enrolled in plans being offered at their workplace in 2008. Forty-one percent of African-Americans participated, and half of white workers were enrolled in a plan. Twenty-eight percent of workers who identified themselves as being of more than one racial background participated in their employers’ retirement plans.

“These numbers have been pretty consistent over the last five years,” says Craig Copeland, senior research associate at the Employee Benefit Research Institute. He adds that participation percentages have remained flat because of the ongoing increase in number of defined-contribution plans versus the decrease in defined-benefit plans. “There has been some movement, but nothing significant,” Copeland says.

While the overall Hispanic participation number is low, Hispanics born in the U.S. participated in plans at a level similar to African-American workers: 39 percent. But only 20 percent of foreign-born Hispanic workers were enrolled in retirement plans, by far the lowest minority participation rate, the institute reported.

This isn’t the whole story for the Hispanic worker today, says Leticia Miranda, associate director for economic and employment policy for National Council of La Raza, a civil rights and advocacy organization.

First, Hispanics constitute 14 percent of the U.S. population today and will rise to 29 percent by 2050, accounting for 60 percent of the nation’s growth from 2005 to 2050, according to the Pew Research Center.

La Raza data show that in 2008, more than 65 percent of the Hispanic workforce was employed at companies that didn’t offer retirement plans. The situation for foreign-born Hispanics is worse: only one in four works for an employer that sponsors a retirement plan. It’s tough discipline to save when there is no preset, formal savings vehicle available at work, Miranda says.

“Many retirement programs come through employers, so access is a huge issue,” Miranda says.

Fernandez says he plans to start saving in his company’s 401(k) plan soon, because he is watching how not saving has affected his parents in Colombia.

His 65-year-old father “owns a small business in Colombia and was never proactive about saving for retirement,” he says. Today, his father doesn’t have retirement money set aside. “I don’t want the same situation for me in 30 to 40 years,” Fernandez says.

The Employee Benefit Research Institute study also looked at participation rates by salary and education level and found workers in the lower segments of these categories tended to participate less in retirement plans. While the institute’s study did not break out these numbers by ethnic or minority group, there is a large amount of research showing that it’s Hispanics and African-Americans who are in these low-education, low-wage jobs.

Copeland says low participation can be tied to unemployment issues as well as bad equity markets. The institute’s statistics show a falling-off in participation by different groups during the 2002 market downturn. The full effect of 2008’s economic crisis won’t be reflected in participation statistics until sometime this year, Copeland says.

Low participation rates among ethnic and minority groups should alarm employers—and society as a whole, says Mellody Hobson, president of money management firm Ariel Investments in Chicago. Since a growing percentage of the workforce is made up of minorities, the trend of low savings points to a future of even more workers who can’t afford to retire but also may not be able to continue working.

Last year, Ariel Investments teamed with Hewitt Associates Inc. and studied retirement savings disparities across different groups. The team found that African-Americans and Hispanics participate in retirement plans less often, and when they do take part, it seems to be a struggle: They contribute less, borrow more from their accounts and overall have lower account balances.

“This issue will become increasingly problematic as we continue to see the demographic shift in this country,” Hobson says.

If employers analyze their federally mandated employment demographic data and cross this information with their 401(k) plan data—as Ariel and Hewitt did in their study—they will begin to see if there are participation problems within their employee base, Hobson says.

After this analysis, employers can decide how to tackle the problem, such as increasing participation rates through automatic enrollment, using automatic escalation of deferral rates and adding more sophisticated financial education.

“Better approaches need to be considered,” Hobson says.

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