Sandra Block and Laura Petrecca, USA Today, July 6, 2009
Many Americans fear they’ll outlive their savings, but African Americans and Hispanics face an even greater risk of spending the end of their lives in poverty.
Members of those two groups are less likely than white and Asian workers to participate in their employers’ 401(k) plans, and when they do contribute, they save less, according to a study scheduled for release today by Ariel Education Initiative and Hewitt Associates.
African Americans and Hispanics also are much more likely to take money out of their 401(k) plans for emergencies, which could further stunt long-term savings growth. And they are less likely to invest in stocks in favor of low-risk investments and real estate, increasing the risk that their savings won’t keep pace with inflation, retirement specialists say.
The survey, which analyzed data from nearly 3 million employees at the end of 2007, found significant differences in retirement savings even among higher-income employees. White workers who made $120,000 or more had an average balance of $223,408 in their 401(k) plans, vs. $154,902 for African Americans in the same salary range.
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Last year’s bear market wiped out 27% of the typical worker’s 401(k) plan, according to Fidelity Investments, forcing millions of Americans to save more, delay retirement or both. Many Americans have increased their savings rate in recent months, even as many employers have reduced or eliminated matches to 401(k) plans. But the Ariel/Hewitt study indicates that African Americans and Hispanics will have to save at a significantly faster pace than others to have a chance at a comfortable retirement .
The survey’s authors say the savings gap among races can be closed by automatically enrolling workers in 401(k) plans, improving financial literacy and giving workers more time to repay 401(k)-plan loans. Why African Americans and Hispanics are falling behind, according to Ariel/Hewitt:
Inexperience
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Competing obligations
African Americans and Hispanics typically have less wealth than whites, says Alicia Munnell, director of the Center for Retirement Research at Boston College. When they’re in a “race to meet the monthly bills,” she says, saving is a lower priority.
African Americans and Hispanics also are less likely to inherit money than whites, Munnell says, which leaves less of a financial cushion against hard times. As a result, she says, these groups have a tougher time putting money in a retirement account and also tend to be more cautious about investing in the unpredictable stock market.
Minorities also may be held back by family obligations, says Monique Morrissey, economist at the Economic Policy Institute. If a worker comes from a demographic group that has been disadvantaged over generations, she says, the individual is more likely to be responsible for family members.
Lack of trust
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African-American workers are less likely than other workers to invest in stocks, which could limit the long-term growth of their savings, according to the Ariel/Hewitt study.
Overall, African-American workers invest 66% of their 401(k)s in stocks, vs. 70% for Hispanics and 72% for whites. African-American employees ages 30 to 49—considered the prime ages for investing in stocks—were the most conservative.
Mellody Hobson, president of Ariel Investments, a Chicago-based mutual fund company, has studied African-American attitudes toward investing for years and says her research suggests that many equate investing in the stock market with gambling.
Years like last year, she adds, “reinforced this point of view, when you see these wild rides and massive volatility.”
“When we do invest, we prefer real estate, outside of an employer-sponsored retirement plan,” says Hobson, who is black. “And when we do save, we favor more conservative investments.”
Older Hispanics also are less likely to trust financial markets, says Jay Rossi, principal of multicultural marketing firm DDR Global. “They hold onto money and invest in tangible things that one can touch, see and manage, such as real estate and cars. The whole idea of putting money into the hands of professional money managers is relatively new.”
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Higher withdrawal rates
African Americans are more than twice as likely as whites or Asians to take a hardship withdrawal from their 401(k) plans. The withdrawal rate also was higher for Hispanics, although not as high as African Americans’. Asians had the lowest rate.
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An employee who takes a $10,000 hardship withdrawal from his retirement account could have to pay out more than one-third of the money in taxes and early-withdrawal penalties, Edwards says.
In addition, she says, the withdrawal permanently would reduce the amount of money available to grow and compound. Assuming an average annual return of 8%, a 45-year-old employee who takes a $10,000 hardship withdrawal would reduce his account balance at age 65 by nearly $47,000, according to an analysis by Towers Perrin. A 35-year-old worker who takes a $10,000 hardship withdrawal would reduce her account balance at 65 by more than $100,000.
African Americans and Hispanics also are more likely to borrow money from their 401(k) plans than white and Asian workers, the study states.
Borrowing from a 401(k) plan won’t hurt the employees’ retirement savings if the worker repays the money, Hobson says.
