Under-participation by minorities in America’s 401(k) system represents a significant economic disparity that requires creative, private-sector solutions.
Auto portability – an emerging plan feature that automatically moves small balance accounts forward when participants change jobs – could play a critical role in helping to bridge the participation gap.
Consider the following statistics:
- According to U.S. Census Bureau figures, in 2015 minorities represented 38.28% of the general population of the United States.
- In contrast, a 2009 Employee Benefits Research Institute (EBRI) study indicated that minorities account for only 24.9% of total 401(k) participants.
Clearly, the very population segments that would benefit the most from supplemental retirement income are not participating. To make matters worse, the participation gap could widen. The U.S. Census Bureau projects that minorities will become a collective majority by 2045, reaching 50.72% of the general population.
In order to provide retirement security for all segments of the American population, changes will be necessary.
Two Paths to Bridge the 401(k) Participation Gap
At its simplest, there are two basic paths to increasing minority participation in 401(k) plans:
- Increase minority access to 401(k) plans in the workplace.
- Where plans are offered, increase minority participation levels.
Increasing access to 401(k) plans is a complex undertaking. In 2016, this was the key focus of the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings, when the BPC offered 16 proposals that addressed 6 key retirement security challenges – with the #1 challenge identified as Americans’ inability to access workplace retirement security plans. In addition, federal and state governments have weighed in with a patchwork of retirement savings initiatives.
Where plans are offered, creating conditions that promote increased minority plan participation is another, vital path to parity. Here, increasing the uptake of auto enrollment seems to be a sure-fire solution.
In 2011, the Society for Human Resource Management (SHRM) cited research by Vanguard Investments that auto enrollment promoted an increase in participation, but this increase was particularly high for African-American and Hispanic workers. When auto enrollment was offered, participation rates improved from 57% to 94% for African-American workers, and from 67% to 95% for Hispanic workers.
The dilemma with auto enrollment is that the feature has unintended consequences, including an explosion in the number of small-balance accounts. These problems are particularly troublesome in higher-turnover industries that are typically over-represented by minority workers. Citing high costs, these plan sponsors have naturally been reluctant to add an auto enrollment feature. Not surprisingly, the growth of auto enrollment has slowed dramatically in the last 3 years.
The Role of Auto Portability in Promoting Minority Plan Participation
Auto portability is specifically designed to address the problem of small accounts (<$5,000) that are subject to mandatory distributions. Using electronic records matching to locate a separated participant’s active account at their current employer, auto portability will automatically move these balances forward, solving the small account problem for plan sponsors.
With the small account problem solved, employers in industries that experience high turnover will be much more likely to activate an auto enrollment feature, confident in the knowledge that they won’t be awash in a sea of small accounts. Increased auto enrollment will, in turn, disproportionately increase minority participation levels in these plans, while simultaneously preserving minority participants’ savings for retirement.
In May 2016, a discrete event simulation model, developed by Dr. Ricki Ingalls and Retirement Clearinghouse, with key data points supplied or validated by EBRI, demonstrated that auto portability dramatically reduces cashouts and increases retirement savings retained in the 401(k) system, over the next 30 years. For the sub-$5,000 balance segment, as many as 29 million job-changing minority participants would be impacted by auto portability. When the balance level is increased to $15,000, the numbers surge to over 46.5 million.
Clearly, auto portability can play a vital role in resolving the minority 401(k) plan participation gap.