Race and Retirement

This week's blog is going to be controversial. I thought long and hard before writing it, and you may take offense in reading it. But I believe it illustrates a financial planning problem that isn't receiving the attention it deserves.

I recently read a Vanguard Funds institutional research report (see attachment). Vanguard wanted to examine participation in its clients' 401(k) accounts; this is common, I see similar reports released all the time.

What was different in this case? Vanguard separated its participants by their ethnicity, to create four distinct ethnic categories: Whites, Asians, Blacks, and Hispanics (their terminology, not mine).

Vanguard used six group retirement plans with over 200,000 employees, and judged them to be a representative sample of all plans. In each of the four ethnic categories, participants' average ages were roughly the same (early 40s). But here's where they differed (using rounded numbers for clarity):

Whites: average annual income: $59,600. Average 401(k) account balance: $63,600.

Asians: average income: $74,400. Average account balance: $73,300

Blacks: average income: $39,400. Average account balance: $21,700.

Hispanic: average income: $45,900. Average account balance: $30,000.

To put it another way: compared to Whites, Asians had an additional $9,700 in their 401(k)s, Blacks had almost $42,000 less, and Hispanics had $33,600 less.

It is these latter two ethnic groups I wish to discuss, and I mean no offense in doing so.

We often hear that African- and Hispanic-Americans have lower average pay than Caucasians. This seems accurate, and is borne out by the data in Vanguard's study.

What we don't hear is how this disparity affects retirement savings. Even though the average worker in the study is relatively young, there's already a substantial difference in retirement assets between the different ethnic groups.

What causes this difference? Vanguard ran statistical models, and found four factors: compensation, job tenure, contributions, and withdrawal rates. Compensation, not surprisingly, was the major factor: African- and Hispanic-Americans have lower average annual incomes, and their account balances reflect this. The other three factors were relatively minor. I did find it scary, as a financial planner, to see the difference in hardship withdrawal rates: 17%, 7%, 40%, and 23% of accounts respectively.

So, how can we fix this problem? Many of the causes are far beyond the scope of this blog, and may even extend past our lifetimes.

That said, Vanguard did find one solution: automatic enrollment. Using this policy, all new workers at a company are automatically signed up for 401(k) contributions, whether using their own money, or via corporate funds.

The difference is striking. In companies with voluntary employee contributions, the participation rate by ethnicity is 77%, 95%, 64%, and 70%, respectively. With automatic enrollment, participation rates not only increase to roughly 96%, but equalize there as well, regardless of ethnicity.

I don't care which ethnic group you're in; I'm more concerned with your quality of life. No matter which part of the world your ancestors hail from, or your level of income, keep saving as much as possible to fund your retirement and increase your net worth. But if you're African- or Hispanic-American, know that you have one extra hurdle you may not have planned for. And for anyone who finds it difficult to voluntarily save, consider asking your employer about automatic enrollment. The extra savings, compounded over your working years, can be the difference between a comfortable and a stressful retirement.

Lou Dagen is a Certified Financial Planner in the San Francisco Bay Area. For 23 years, he has helped clients around the world retire in comfort, educate their children, and increase their net worth. If you have questions, please post them in the comments below or call Lou directly at 925-997-8507.