Study: Absence of a pension plan Getting to the “root of the problem”

Accumulating retirement savings is a three-step process, each requiring an active decision, but the first and most important of the three steps remains elusive, especially for many minority workers, according to a new study.

Participation, contributions and allocation of investments are of course the three stages, and the adoption of automatic features and qualified default investments have helped the last two, but access to pensions has been an issue persistent, as some employers, especially smaller ones, struggle to offer a plan to their employees.

In a new white paper, Race, Retirement, and the Savings Gap, based on his annual survey of retirement savings and spending and analysis of the Census Bureau’s 2021 Current Population Survey, T. Rowe Price found that about half of all workers participate in any pension plan. However, when a pension plan is offered by an employer, participation increases significantly to 88.2%.

In an earlier report, T. Rowe found that black and Hispanic workers lagged significantly behind white workers in terms of participation and savings, which reinforces the idea that plan access and plan design can help close this gap and encourage other positive financial behaviors as well.

Participation gap

On average, minority workers earn significantly less than their white counterparts, and to a large extent the difference in income drives the difference in plan take-up rates, the paper notes.

While nearly 6 in 10 white workers participate in a retirement plan, that compares to 4 in 10 black workers and 3 in 10 Hispanic workers. These two racial groups with the lowest retirement plan participation rates also have the largest share of their workers in the two lowest income groups. Research also finds that the racial and ethnic participation gap narrows significantly when a pension plan is offered. Compared to whites (90.4%), blacks (81.6%) and Hispanics (82.2%) have only slightly lower participation rates, according to the research.

Not surprisingly, the research also finds a strong positive correlation between company size and pension plan participation. For small businesses with less than 25 employees, T. Rowe Price found that only 28.3% participate in a pension plan. Large companies (more than 1,000 employees) have a much higher participation rate (63.5%).

And the fact that small employers struggle to provide a plan matters because they employ a disproportionate number of minority groups. For example, a large portion of Hispanics (37.8%) and mixed-race and other workers (30.1%) work for small companies (fewer than 25 employees), which are less likely to offer pension plans. retirement.

“Clearly, the combined effect of the inability of small businesses to provide a pension plan and the large shares of minorities working for these small businesses contribute to racial and ethnic gaps in participation rates,” writes Sudipto Banerjee, Vice President of Retirement Thought Leadership. at T. Rowe Price and author of the article.

As such, increasing the number of small businesses offering retirement plans could help close the racial gap in retirement savings, he says, adding that research has found that there is no There is virtually no difference in participation rates between employees of small businesses and large businesses.

Reduce disparities

Still, the racial gap between income and wealth suggests that declining income isn’t the only challenge making it harder for blacks and Hispanics to save and build wealth, the paper notes.

A fundamental tenet of saving is to start early and save regularly, but the company also sees a significant gap between whites and other minorities. According to the research, 38% of white participants say they started saving for retirement before age 30, compared to just 18% of blacks. Indebtedness can also impede the progress of minority participants’ retirement savings. Black and Hispanic participants are more likely to hold all types of debt than their white counterparts.

What can the pension industry do to reduce disparities? Although there is no simple solution, the paper suggests that the industry can take action, because improving access to pensions is not just an issue for policy makers.

“These findings underscore that the first and most important step toward closing the retirement savings gap is to expand access to pension plans,” says Banerjee. “The pension industry can act now to help close the gap by encouraging employers to not only sponsor plans, but to incorporate plan design levers, such as auto-enrollment and self-escalation, and offering financial wellness programs.”

Banerjee also writes that if more employers offer programs that help participants save for emergencies, manage debt, and budget, it could reduce financial stress and help improve employment outcomes. pension saving.

Minorities are also receptive to advice and seek help from the most familiar sources, he says. “The workplace remains the most important source of advice and support for all retirement savers, and even more so for minority savers,” Banerjee points out. “This is a great opportunity for employers to try to improve the financial lives of employees who view the employer as a trusted source of financial advice.”

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