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 healthcare 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:
- 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, including:
- 68% average plan enrollment, vs. 79% for white participants
- 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 adverse retirement outcomes for African-Americans, including:
- 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.
- Improve access to workplace retirement savings plans.
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.
- 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.
- 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
- 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.
For More Information
For the detailed issue analysis “The African-American Retirement Crisis: How Auto Portability Will Help” visit https://info.RCH1.com/AP-issue-analysis.
For more information on Auto Portability, visit https://www.RCH1.com/auto-portability.