401(k) plans: a call to action: employers need to boost up auto-enroll and discourage withdrawals to keep employees from sabotaging their retirement.

Author:Hobson, Mellody
Position:Total Return

I HAVE A PASSION FOR BUILDING WEALTH THROUGH investing--which is why I love 401(k) plans. In a 2009 column I wrote about the challenges African Americans face in maximizing the benefits of these retirement plans. That piece discussed the information in the 2009 Ariel/Hewitt study. This article is an update, using the 2012 Ariel/Aon Hewitt study, 401(k) Plans in Living Color: A Study of 401(k) Savings Disparities Across Racial and Ethnic Groups. Although African Americans are still falling behind, there's plenty of good news: We have made progress, and new information makes for sharper and stronger recommendations.

First, let's recap. The inaugural 2009 study used detailed facts and figures from 2007 data to help identify a problem. That is, few experts knew that minorities tended to have lower 401(k) balances, and the causes for this were murky. Our first study firmly established that income disparity was not the main culprit--the differences were driven instead by behavior and belief. On average--within income groups--African Americans made lower 401(k) contributions, took more loans and withdrawals, and invested more conservatively than whites, all of which drove lower balances. Our main recommendations then included modifying loan rules in order to decrease the likelihood of default, and adopting automatic enrollment to help ensure that employees invest for retirement.

The 2012 study paints the same basic picture, but uses added detail from 2010 data. True, we still have significantly lower balances in our retirement plans. In the salary range of $30,000 to $59,999, the typical African American has a $24,500 balance versus $42,700 for whites. Whereas in 2007 African Americans devoted 66% of assets to stocks, versus 72% for whites, that gap has narrowed. As of 2010, whites have a 71% stock weighting and African Americans have a 68% equity stake. A key reason for this shift is that auto-enrollment has become more effective and common, placing more Americans in so-called target-date funds (which begin boldly and gradually become cautious as retirement nears). In 2007, just 58% of employers used auto-enrollment, versus 67% three years later. The impact of such programs is huge, especially at incomes of less than $30,000 annually: 79% of lower-income African Americans subject to auto-enrollment...

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