Wednesday, October 17, 2007

401(k) Plans and Race

401k_2 A highly interesting study was conducted recently comparing retirement saving rates in 401(k) plans based on race:

The Washington Post reported this past Sunday:

Employers have begun to find troubling racial differences within their 401(k) plans, a gap they say could leave black workers far less financially prepared for retirement than whites.

Investor surveys and research by two large employers strongly suggest that blacks participate in retirement plans at far lower rates and are much less likely than whites to invest in the stock market. An industrywide study of 401(k) plan activity by race has never been conducted.

Exelon, the country's largest operator of nuclear power plants, found this year that about 15 out of every 100 black employees did not participate in its 401(k) plan, compared with about 10 of every 100 whites. It also found that one in three black employees contributed less than 5 percent of pay to the plan, compared with just 14 percent of whites.

The solution to this problem may be as simple as the automatic enrollment provisions in the Pension Protection Act of 2006:

McDonald's found in 2004 that half of its black store managers contributed to the company's 401(k) plan, a lower percentage than whites. The company said that by auto-enrolling store managers into the plan it has reversed the trend; today, 95 percent of black restaurant managers are plan participants.

So is this a cultural phenomenon or is there just a lack of emphasis on retirement savings within some communities?:

Experts attribute lower investment rates to poor instruction on financial topics in public schools, and misconceptions about the risk of stocks within parts of the black community. Employers have also been urged to tailor their messages on retirement savings to account for what some black and Latino executives say are important cultural differences. And the federal government has been urged to strengthen its national strategy for financial literacy, which has been criticized as ineffective.


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» Choice Architecture, 401(k) Plans and Race: The Answer to a Conundrum? from Boston ERISA Law Blog
I have talked before on this blog about behavioral economics and choice architecture, which concerns the idea that how we structure retirement savings options will affect whether, and how successfully, people save for retirement. You can find a couple ... [Read More]

Tracked on Oct 18, 2007 12:04:59 PM


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