Retirement Matters (Benefits Inclusion & Equity Series)

Why do retirement benefits matter?

Retirement is a changing landscape: 54% of workers plan to either work past 65 (40%) or plan not to retire at all (14%), and only 22% plan to stop working at a specific time. Whatever their plans, most employees must save and invest for retirement, as life-long pensions are no longer “part of the deal,” and there continue to be concerns about the long-term viability of the Social Security system.

Former employees with a well-funded retirement can be good for a company's reputation. This may be valuable in a tight-knit industry where future hires may be influenced by the perceptions of former employees, and/or for a consumer-facing business. Employees who depart on their own schedule, with a well-funded retirement, are more likely to take their next steps happily and with enthusiasm, which sends a good message to their former teammates.

For employees, having access to high-quality, low-cost investments is a big advantage in and of itself. And setting aside savings every month takes advantage of dollar-cost averaging, reducing the impact of market fluctuations.

Gaps

"Wage gaps," such as between men and women, and Whites and people of color, certainly affect retirement savings. This critical topic is getting a lot of attention elsewhere; we’ll focus here just on the retirement benefits themselves.

More White Americans (44%) than Black Americans (33%) identify "preparing for retirement as their most important financial goal” and this likely impacts the choices people make. There are two primary choices to be made: how much to contribute, and how to invest those funds. We’ll try to make sense of the data, even where different sources report conflicting information.

There are some differences in saving for retirement.

• Participation in company-sponsored retirement plans seems to be highest for Asian Americans at 84%, followed by White at 78%, Black at 76%, and Latino at 75%.
• Ariel-Schwab notes material differences; even for those with $100K+ annual income, White investors set aside an average of 50% more money than Black Americans ($1031/month compared with $686/month). But according to Transamerica, all racial/ethnic groups have a median contribution rate of 10% of pay.
• There are sizable differences in total retirement savings: Asian American workers with a median of $90K, White $63K, Latino $28K, and Black $17K. This may be due in part to differences in the rates of taking loans and/or early withdrawals, at 39% for Black participants, compared with 31% for Latinos, 27% for Whites, and 20% for Asian Americans. These drawdowns can make a big difference in retirement readiness.
• Interestingly, at similar income levels, women are somewhat more likely to participate in retirement plans, likely to contribute somewhat more, while their account balances are slightly lower than those of men (likely because of lower wages and shorter tenure).

There are some differences in investment allocation, too, though some are narrowing.

• Black and Latino investors are far less likely to hold stocks, bonds, IRAs and Keoghs than White investors. But this has begun to change, so that under age 40, 63% of both Black and White Americans now participate in the stock market.
• With that said, retirement plans are the first stock market investments for 63% of Black Americans, and 55% of White Americans. Particularly for these investors, having outstanding default investments is very important.
• Women retirement account holders at Vanguard are more likely than men to hold a single target-date fund, as intended. In part because of that, women trade about 40% less than men; all things equal, less-frequent trading is often better for long-term investment returns.

What can employers do?

• Automatic. Most people want to save, so put employees on the path to automatically get the most out of the plan. Retirement plans can automatically enroll new hires, automatically direct their investments into a low-cost fund targeted for their approximate retirement age (a target-date fund), automatically raise people's investment percentages every year, and even automatically re-allocate people's investments (if done carefully and with appropriate notice). Of course, employees should still retain full control to make any changes needed.
• “Matching” debt repayment. See our previous article for a description of how to help employees pay off student loans and still get retirement contributions.
• Safer first-dollar investments. Some employees may worry about losing money in the market. In most senses, the employer match provides a cushion against market losses: for example, if the employer provides a 50% match, then investments would have to drop by 1/3 before employees would actually lose “their” money. But this may not persuade those new to investing. OregonSaves, a retirement plan for small Oregon employers, automatically directs the first $1000 of contributions to a "capital preservation fund,” then later contributions to a target-date fund. This seems an excellent solution, though I'm not aware of other plans that have adopted this approach.
• Non-matching contributions. Most employers provide a “matching” contribution. To help employees having trouble making any contribution, the employer can consider making part of the contribution “non-matching.” For example, instead of providing up to 6% of pay as a 100% matching contribution, the employer could contribute 3% automatically (non-matching), and then up to 3% of pay as a 50% matching contribution. Those who contribute 6% would still get the maximum company contribution of 6%, but even those who contribute nothing would get 3%.
• Advice, including Education. Perhaps most importantly, consider provide education and advice to employees. With the wide range of future plans cited above, retirement is no longer "one size fits all," if indeed it ever was. Individualized assistance is therefore more valuable today than ever, covering a broad range of topics, including investments, budgeting, mortgages, other loans, and even wills.

Limit withdrawals. Limiting withdrawals to true “hardships” could result in higher retirement balances. But we also know that the ability to withdraw funds is particularly important for those facing cash-flow challenges, enabling them to make contributions because they know they can get the funds “out” as/if needed. This should certainly be discussed, but should be evaluated carefully, perhaps in the context of helping employees save for emergencies.

These solutions, and others, will help anyone facing challenges in retirement savings, no matter what their demographic. But they should also be considered in an Inclusion and Equity context: groups facing significant challenges will particularly benefit.

Note: Figures in this article are drawn from multiple sources, including the Transamerica Retirement Survey (2019), the Ariel/Schwab Black Investor Survey (2020), Vanguard's How America Saves 2020, and the Social Security Administration.

Is your firm addressing retirement, including gaps? Why or why not? And how? Please share in the comments, or message me directly.

In our next article, we'll look at gaps in heart health.