By Thomas Hawkins | January 11, 2023
Policymakers and stakeholders in America’s defined contribution system have made important progress in advancing initiatives that could help to close the large racial wealth gap. While much of the groundwork has been laid, it will ultimately fall to retirement plan sponsors to make the difference by supporting four key retirement initiatives that will generate increased wealth and enhance retirement security for millions of America’s minority workers.
The Racial Wealth Gap
In 2022, the U.S. Department of the Treasury revealed that the median Hispanic and Black families had $38,000 and $23,000 in wealth, respectively, compared to $184,000 for white families, and these gaps have remained virtually unchanged over the past 20 years.
Meanwhile, America’s retirement system has long-standing racial gaps of its own. While minorities currently comprise 39% of our population, they account for only 25% of defined contribution (DC) plan participants. Also, those minorities fortunate enough to participate face headwinds in preserving their savings – cashing out at significantly higher rates that their counterparts.
Four Retirement Initiatives That Will Move the Needle
Four retirement initiatives – expanded access, auto portability, emergency savings and the Saver’s Match – will play outsized roles in closing the racial wealth gap.
1. Expanding Access to Workplace Retirement Savings Plans
It is impossible to overstate the case for expanding access to workplace retirement savings plans, as more access is a prerequisite to serving a rapidly growing minority population that has been historically under-represented in our defined contribution system.
Over the next 40 years, minorities will collectively become a majority, accounting for about 56% of the American population. In the face of that shift, our defined contribution system must grow to accommodate these workers – otherwise, any shift in DC participation is a zero-sum game, where there are winners and losers. Expanded access produces winners all around and becomes the “great equalizer” as it brings minority DC participation in-line with underlying population demographics.
Fortunately, expanded access to workplace retirement savings plans is already becoming a reality, via multiple initiatives including provisions for long-term part-time (LTPT) workers, pooled employer plans (PEPs), state-level Auto IRA programs and a variety of other proposals.
2. Auto Portability
Expanded access initiatives, when considered by themselves, have one flaw – the new participants, comprised mostly of minorities – tend to cash out at much higher rates than their counterparts. Auto portability directly addresses this dilemma by preserving minorities’ small-balance retirement savings after they change jobs.
A newly released version of the Retirement Clearinghouse (RCH) Auto Portability Simulation (APS) modeled the effects of auto portability, paired with expanded access and the 12/31/23 increase of the mandatory distribution threshold, from $5,000 to $7,000. The model applies a race and ethnicity overlay, where minority participation gradually increases over a 40-year period to mirror the general population.
Under auto portability, the APS finds that 98 million minorities will change jobs with balances less than $7,000, and will preserve an incremental $744 billion in retirement wealth, while 30 million Black Americans will preserve an incremental $216 billion in retirement wealth. A new infographic summarizing the impact of auto portability on America’s minorities is available here.
3. Emergency Savings
While auto portability addresses non-emergency cashout leakage, emergency savings could help stem leakage resulting from financial emergencies. Under Section 127 of SECURE 2.0, emergency savings are advanced through two provisions which, beginning in 2024, include: 1) emergency withdrawals of up to $1,000 per year and 2) allowing pension-linked emergency savings accounts, or PLESAs, to which non-highly compensated employees can contribute up to $2,500 on a Roth basis, indexed for inflation. If they choose to offer them, employers may also auto-enroll participants at a rate of up to 3% of pay into PLESAs and must allow withdrawals at least once per month.
There is understandable concern that measures linking emergency savings to retirement balances might lead to increased cashout leakage, as participants begin to view their retirement savings as a ready source of discretionary funds. However, I believe that the provisions of the legislation establish meaningful separation from retirement funds and should achieve their desired policy objectives, over time.
4. Saver’s Match
Of all the retirement initiatives discussed thus far, the Saver’s Match may wind up positively impacting the most minority savers, over time. Scheduled to replace the Saver’s Credit for the tax years following 2017, the Saver’s Match allows for qualified individuals participating in a retirement plan or contributing to IRA to receive a 50% federal matching contribution up to a maximum of $2,000 ($4,000 for if married filing jointly), deposited directly into the taxpayer’s IRA or retirement plan.
A cursory examination of IRS tax filings and W2 data suggests that tens of millions of tax filers with qualifying adjusted gross incomes could be eligible to receive a matching contribution from the federal government, every year.
Given the income segments eligible to claim a matching contribution, there’s solid reason to believe that the Saver’s Match – like auto portability – could disproportionately benefit minorities. While research on the benefits of this initiative is evolving, a November 2023 DCIIA Academic Forum showcased research from the Collaborative For Equitable Retirement Savings (CFERS), a joint endeavor by DCIIA, Morningstar and the Aspen Institute’s Financial Security Program. That research, presented by Morningstar’s Jack VanDerhei, modeled 2 Saver’s Match scenarios that projected substantial increases in the ratio of plan account balances vs. salary, across race and gender categories. While every cohort realized significant benefits, minorities and women benefitted the most.
I believe it’s a good bet that additional research on the Saver’s Match will confirm that the benefits to minorities will be substantial.
The Importance of Plan Sponsor Action
This time of year, as we observe Martin Luther King, Jr.’s birthday, followed in February by Black History Month, we have an opportunity to consider actions that we can take to promote equality for America’s minorities.
To that end, policymakers and industry stakeholders have led the way in moving key retirement initiatives forward that set the stage for making real, quantifiable differences in closing America’s racial wealth gap. Moving forward, it will be retirement plan sponsors that will drive change by fully embracing these initiatives, generating more minority wealth, and enhancing retirement security for all.Back