Plan sponsors finally have statistical proof that automatic
enrollment can narrow the persistent racial gap in retirement
savings. Unfortunately, other stats from the same research show
that auto enrollment can widen the gap.
In a new study of seven large clients by Vanguard Group,
those that automatically put new hires into a 401(k) plan
increased the participation rate by more than 60 percent among
black employees to 94 percent from 57 percent and
by more than 40 percent among Latino employees, to 95 percent
from 67 percent. As a result, the two groups statistically
caught up with the rates of white and Asian employees.
This is another reason for introducing automatic
enrollment if you havent offered it already, says
Stephen Utkus, head of Vanguards Center for Retirement
Research and a co-author of the study.
The catch is that the companies allocated an average of just
3.2 percent of employees paychecks to the 401(k)s, a
typical amount in these automatic programs but far less than
retirement experts say is needed. After enrollment, black and
Latino employees pretty much stayed at the default level.
However, white and Asian employees increased their allocations,
widening the racial disparity again.
Automatic enrollment is a good step, says Pamela
Hess, director of retirement research at consulting firm Aon
Hewitt. But its not going to bridge the gap
With automatic enrollment, differences in
participation and savings are much reduced, says
Annamaria Lusardi, a professor of accounting and economics at
the George Washington University School of Business. But
it might not eventually be the best way to help
Thus, according to Lusardi, employers will have to take more
steps, perhaps coupled with education starting in elementary
For years surveys by Aon Hewitt and others have shown that
blacks and Latinos participate in 401(k)s at lower rates and
save significantly less than whites and Asians in their plans.
This holds up even after controlling for factors like age,
income and job tenure. For instance, in the Vanguard study the
participation rates for whites and Asians without auto
enrollment were 73 percent and 90 percent, respectively
way above the 57 percent and 67 percent of blacks and
Making matters worse, the latter two groups were more likely
to reduce their nest eggs through withdrawals and loans,
according to a survey of 3 million employees at 57 large
companies that Hewitt Associates (as it was then named) and
Ariel Investments conducted in 2007.