Plans tackle problem of racial disparity in savings

Amid the nation's soul searching over racial, economic and social justice, some plan sponsors are turning greater attention to racial disparities in savings and participation rates in the retirement plans they offer employees.

"It certainly has gained a lot more interest recently," said Neil Lloyd, partner and head of U.S. defined contribution and financial wellness research at Mercer in Vancouver, British Columbia.

The statistics plan sponsors are seeing indeed are sobering. More than two-thirds of white non-Hispanic families (68%) have retirement account savings, compared with 41% for Blacks and 35% for Hispanics, according to the Economic Policy Institute, an independent non-profit think tank. Black and Hispanic families also lag their white peers in terms of how much they've been able to save, with Hispanic families saving a median of $23,000 and Black families saving a median of $29,200, compared with $79,500 for white non-Hispanic families.

The gap not surprisingly is showing up in the retirement readiness of minority groups as measured by the National Retirement Risk Index published by the Center for Retirement Research at Boston College. More than 3 in 5 Hispanic households (61%) and more than half of Black households (54%) are at risk of inadequate income in retirement compared with 48% for whites.

Plan sponsors are not deliberately doing anything wrong, said Jeffrey Brown, professor of business and dean of the University of Illinois' Gies College of Business in Urbana-Champaign. The racial wealth gap in retirement savings is not due to racist behavior on the part of plan sponsors but rather a complicated set of factors, including the makeup of the workforce itself, Mr. Brown said.

"It's not that any given employer is saying, 'I'm not going to cover somebody or I am going to cover somebody because of race,'" he said. "They're playing by the rules. They're following the plan qualification requirements."

Mr. Brown said one reason for "differential impact by race" is that retirement plans typically do not to cover part-time workers, who tend to be dispropor-tionately Black and Hispanic. Part of the problem is also tied to the fact that smaller employers — where most minority workers are employed — are less likely to offer retirement plans, he said.

Whatever the causes of the disparities, plan sponsors are mindful and sensitive to the issues, according to industry observers. Some are strengthening their financial literacy and financial wellness programs, while others are reviewing their investment lineups with a view to adding ESG funds or other types of socially responsible investments that, say, consider pay equity at companies in which they invest.

"Conversations about everything that has to do with racial disparities and social justice and economic justice and mobility are coming up across our client base," said Meredith Jones, a partner and global ESG lead at Aon PLC in Nashville, Tenn.

In addition to looking at ESG funds, which have "a strong diversity component to it," some are looking into making allocations to women- and minority-run funds, Ms. Jones said. Other clients are looking to address issues like pay disparity, which Ms. Jones said is a contributing factor to the lack of retirement savings among minorities. Beth Conradson Cleary, executive director of the City of Milwaukee Deferred Compensation Plan, looks to benchmarking to track racial disparities. Ms. Cleary, for example, started benchmarking the financial wellness programs the plan offers its 9,079 participants by race, gender and salary quartiles, a practice that is also assiduously applied when evaluating the $1 billion 457(b) retirement plan overall.

A review of its plan by gender, race and salary in 2015 "showed a big divide," with Blacks and Latinos trailing other employees in plan participation and savings rates, she said. As a result, the city of Milwaukee overhauled the plan and implemented a series of automatic features, including automatic reallocation to age-appropriate target-date funds. The move boosted plan participation among Blacks and Latinos to 82% at the end of September 2019, up from 62% for Blacks and 69% for Latinos at the end of September 2016. The participation among other employees increased to 84% from 74%.

"We took the temperature in 2015 and we started the conversation about how we can address these disparities," Ms. Cleary said.

Not all plan sponsors have access to data based on race because not all record keepers track it, but sponsors that do are increasingly interested in how plan design features, such employer matches and waiting periods, might have "the unintended consequence of disadvantaging one group or another," said Mercer's Mr. Lloyd. A plan sponsor, for example, recently scrapped a plan to implement a new matching formula designed to encourage more retirement savings after it was studied "through an ethnicity lens," he said. While the proposed match seemed to work well in aggregate, it was unfavorable to two ethnic groups, Mr. Lloyd said. Other sponsors are looking for ways to get minority populations more engaged with their plans. It's important to make sure that participant communications are inclusive and relatable, said Elizabeth Aidoo, a bilingual Spanish-English financial adviser with Francis Investment Counsel LLC in Brookfield, Wis., who specializes in working with minority employees.

An all-purpose "everything kind of class" that covers budgeting, emergency savings and getting out of debt was playfully named "Tell Your Money Where to Go" — rather than something like financial planning — to make it more approachable and "not stuffy," Ms. Aidoo said.

Some plan sponsors are scrutinizing the disparities in attendance at group financial education sessions as well as participation in one-on-one financial coaching between salaried employees and hourly employees, which tend to be minority workers. Those who attend the workshops and avail themselves of the one-on-one meetings are predominantly "office folks" and not hourly workers concerned that they might not get paid if they take time off from work to attend, Ms. Aidoo said.

In light of this, some sponsors are making group financial education sessions mandatory and in some cases even taking the extra step of scheduling one-on-one meetings with all employees in advance, Ms. Aidoo said. Sponsors would not dock hourly workers for taking classes during their regular shifts.

While everyone can benefit from financial guidance, it's particularly helpful for Black, Hispanic and other minority groups, where the wealth gap is significant, Ms. Aidoo added. "It makes such a huge difference to them because they very well may not have anybody that is giving them advice or good advice," she said.

Still, moves to bump up financial education and other initiatives from well-intentioned sponsors are unlikely to fix the problem, said the University of Illinois' Mr. Brown. While he does not consider himself a "heavy-handed regulatory guy," he sees the issue being corrected through public policy changes.

"I think it is going to take a little bit more of a regulatory approach," he said.

Measures to expand coverage to part-time workers, such as those provided in the SECURE Act, are "fine," he said, "but they're not going to have a major impact" given that between half and two-thirds of U.S. workers are not in plans.

Mr. Brown sees state-run retirement plans as possible ways to address the problem, though he favors a national plan for employees of firms that don't offer retirement plans of their own, something akin to the $612 billion Thrift Savings Plan for federal workers.

"If we really want to take this seriously it's inevitable there's going to be some form of either stricter government requirements or just government-run plans with all their faults," he said.