Closing Racial and Ethnic Savings Gaps with Financial Wellness
According to a new white paper by T. Rowe Price, employers have the opportunity to promote diversity, equity and inclusion in defined contribution plans and tackle wider social inequality.
The company released a series of papers digging deeper into the results of its sixth annual savings and spending survey, which focused on the financial attitudes and behaviors of 401 (k) savers and retirees.
Joshua Dietsch, vice president of Retirement Thought Leadership at T. Rowe Price, notes in Financial Wellness Through the Lens of Race and Ethnicity that 401 (k) plans benefited millions of people, but the benefits were not evenly distributed since social inequality in the broader labor market affects retirement provision and general financial health.
Dietch claims that DC plans are one of the few places where access to advice, guidance, and education in support of life’s financial goals is equally encouraged. This offers plan sponsors the opportunity to directly address plan participation and savings gaps through the availability of financial wellness tools and services and better plan design.
“The DC plan is at a unique crossroads. It can be the only place where workers of all races and ethnicities have access to financial education and tools, regardless of income or wealth. In other words, if you have access to a plan, it is a final democratizing force. But that’s not good enough, ”writes Dietsch.
Among those who have access to 401 (k) s, 81% of white householders are on a DC plan, compared with 70% of black and 63% of Hispanic householders, the paper said, citing data from EBRI . Additionally, T. Rowe Price’s research found that Black and Hispanic 401 (k) savings rates were lower compared to their white counterparts. The median procrastination rates were 5% and 8% for black and Hispanic participants, respectively, compared to 9% for white participants.
Meanwhile, 55% of respondents believe that despite insufficient savings, they are saving enough to enjoy a comfortable retirement. The remaining 45% either know they are not saving enough or are unsure whether their pension contributions are enough, the paper says.
In addition, Black and Hispanic respondents were more likely to say they have student loans, medical and other debts, which further affects their ability to save for retirement. The data also suggests that the challenges of saving for retirement may vary by race and ethnicity, and this has implications for employers, financiers and retirement registrars, the paper notes. For example, when asked, 20% of white, 26% of black, and 30% of Hispanic respondents said they had difficulty paying the required monthly bills.
“Unfortunately, our research suggests that the combination of insufficient savings and higher debt will prevent many from being able to retire on their own financial terms and may require a lower standard of living after retirement. Nevertheless, these are challenges for which employers, financial experts and accountants are well positioned, ”says Dietsch.
The first step for employers can be so simple as to solicit under-represented minority workers on what would help improve financial health. According to the paper, solutions start with properly diagnosing the challenges and finding the right mix of strategies that employers and finance professionals can employ in partnership with an accountant to help those retirement savers get financially healthy. That includes helping them better manage their daily expenses, saving for both short- and long-term financial goals – like emergencies and retirement planning – and managing debt, the newspaper notes.
In addition, employers could also include plan designs that prioritize participation, such as automatic enrollment, automatic elevation, or the use of incentives such as B. the adjustment of employer contributions to increase the contribution rates.
Other examples of actions Plan Sponsors can take include:
- Implementing targeted, personalized communications to motivate non-participants and participants to take action based on factors they know;
- Providing automated services (e.g., emergency savings, consumer debt management, student loan repayment assistance, financing, and transaction processing);
- Promote the tax benefits of saving in 401 (k) s and the availability of additional incentives such as the savings loan; and
- Providing training and tools that strengthen financial performance and enable measurements so that participants can see the impact of progress.