Our current retirement system heavily relies on tax-advantaged savings accounts such as 401(k)s. This system works reasonably well in the world of upper-middle-class and affluent people. Unfortunately, that same 401(k) system functions quite poorly for most people outside that top economic layer. African-American and Hispanic workers are particularly unlikely to derive financial advantage from these arrangements. Median financial wealth is quite low for both groups, especially when compared with non-Hispanic whites.
You might think this has a lot to do with access to 401(k)s, but it turns out when the savings accounts are offered to workers at the same company, whites still benefit a lot more than Hispanics and African-Americans. A new working paper by Stanford’s Kai Yuan Kuan, Mark R. Cullen and Sepideh Modrek examined 401(k) participation within a single firm from 2003 to 2010.
Kuan and colleagues find very large disparities in accumulated 401(k) savings. As you can see in this chart above, non-Hispanic white workers accumulated vastly more savings. Disparities would surely be even greater if their analysis included the stock market run-up through 2015.
What's striking in the paper is the many disparities arise among workers who are already actively contributing to their retirement plans. Kuan and colleagues provided data showing how much workers had accumulated in 2010.
| 401k contributions | Black | Hispanic | Non-Hispanic White |
|---|---|---|---|
| Median contribution | $5,538 | $5,935 | $7,314 |
| Median balance | $37,663 | $53,632 | $90,688 |
| Withdrawals | 48.5% | 33% | 21.7% |
| Loans | 23.6% | 24.1% | 13% |
As you can see, African-American and Hispanic workers put aside rather similar amounts to their non-Hispanic white counterparts.Yet minority workers were far more likely to make withdrawals or to take out loans against their 401(k) balances.
Many minority workers, even those steadily employed, have limited family wealth. They are more likely than their white counterparts to face other economic challenges, including the need to support people close to them who require various forms of help. Many workers use their 401(k) accounts as short-term savings or as an emergency fund rather than as a true savings vehicle for their retirement. This isn’t the avowed purposes of the 401(k); it’s what many people believe they need.
Thus do intergenerational wealth disparities persist and grow. When you lack wealth, you invest your limited assets conservatively. You just can’t afford to take chances, even if these chances offer higher expected returns in the long-run.
What are we to make of these patterns? Kuan and colleagues emphasize the behavioral dimension. African-American and Hispanic workers were less likely than their non-Hispanic white counterparts to participate in their 401(k) plans. When these workers did participate, they contributed somewhat less and earned lower investment returns than their non-Hispanic white peers.
Kuan and company have a point. Differences in financial sophistication certainly play an important role. An improved system might help employees make better choices. Minority workers at this firm strongly favored safer asset classes such as money market funds that provide very low returns over the long-run. An opt-out system with simple, low-fee target date funds could be especially helpful.
I’m sure millions of workers could invest their money more effectively. We should help people do that. Yet most people will not—and often realistically cannot—accumulate sufficient wealth on their own to finance a secure retirement.
Workers of all backgrounds would benefit from the right nudges and incentives. They would benefit even more from a solid, soundly-financed Social Security retirement benefit.
Harold Pollack is the Helen Ross professor at the School of Social Service Administration and co-director of the Crime Lab at the University of Chicago.