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.
Finance and business experts say the explanations are
complex, a mixture of socioeconomics and culture.
Hal Hershfield, an assistant professor of marketing at New
York Universitys Leonard N. Stern School of Business, is
researching whether the sense of power that one has in
daily life can actually affect spending and saving
behavior. Another theory holds that if people see few
members of their ethnic group living to old age perhaps
because they cant afford medical care it may be
hard for them to envision a need to save for retirement.
Among Latinos, says Aon Hewitts Hess, supporting
relatives often takes priority over saving for retirement.
Both Hess and Vanguards Utkus suggest that black and
Latino employees may have less faith in financial markets.
Related to that, employees from poor backgrounds, a group that
includes large numbers of black and Latino workers, are less
likely to learn financial basics from family, friends and
employers, says George Washington professor Lusardi.
When Boston Colleges Center for Retirement Research
analyzed the Federal Reserves triennial Survey of
Consumer Finances, which polled 4,500 U.S. households for 2001,
2004 and 2007, it found that factors like a college degree,
home ownership and nonpension wealth were the most important
determinants of 401(k) savings.
Although both blacks and Latinos generally lag the other two
ethnic groups, Latinos tend to do slightly better than blacks
in some categories. Their auto enrollment jump in the Vanguard
survey was less dramatic because they started from a higher
level of participation, and they were much less likely to make
withdrawals and loans in the Ariel/Hewitt survey.
One possible reason, Hess suggests, is that black households
may have fewer breadwinners, while Latinos may live with
extended families. NYUs Hershfield cites the social
psychology concept of stereotype threat. He
explains, When people are aware of the stereotypes that
exist about their group, they get anxious and flustered when
theyre making decisions in the domain that stereotype
applies to. And African-Americans are more likely than
Hispanics or other groups to be stereotyped as being bad at
math and finance, Hershfield says.
Ariel/Hewitt and Vanguard are now respectively conducting
and planning follow-up studies to delve further into the
If sponsors understood why some ethnic groups were more
likely than others to join 401(k) plans, could they do
something about it?
The old standby of workplace-based, targeted education
could be one way to change behavior. Youre not
going to say, We only want African-Americans at an
educational meeting at noon,? Utkus points out. But
an employer can schedule a meeting just for people who
havent enrolled in the 401(k), a group that is likely to
encompass a large percentage of African-Americans.
Most important is for schools to teach financial literacy
every year, starting as early as possible, just
like they teach the three Rs, says George Washington professor
And what about automatic enrollment? The Vanguard survey
would seem to show that it works. Auto enrollment brought all
four groups to statistically equal participation levels: 98
percent for Asians, 95 percent each for Latinos and whites, and
94 percent for African-Americans.
True, the Vanguard sample was small and self-selecting, and
the companies had particularly well-designed and generous
retirement programs, as the study puts it. Still, Utkus
and co-author Cynthia Pagliaro say their results are valid
because these companies have diverse workforces, with blue,
pink and white collars, and also support auto enrollment as at
least a partial solution.
The real problem is the low default savings rate. Plan
sponsors typically auto-enroll people at about 3 percent, and
history shows that inertia will keep most participants at
whatever level theyre put at. However, experts recommend
saving at least enough to max out on the company match
usually 6 percent of pay or even as much as 15
One solution is automatic escalation: methodically
increasing the contribution rate by, say, 1 percent annually.
But if companies set the default too high, warns
Hershfield, people really feel it in their
paycheck, and then they will overcome their inertia to
bolt the plan.
Except, apparently, whites and Asians, who boosted their
auto defaults to an average 4.4 percent and 5.6 percent,
respectively, in the Vanguard report.