Study: African Americans, Hispanics "significantly" unprepared for retirement

Not surprisingly, lower participation and contribution rates lead to smaller average account balances for African-American and Hispanic workers. The Ariel/Hewitt study illustrates this point dramatically. For example, employees who earn between $30,000 and $59,999 show a significant difference in 401(k) account balances: African-Americans ($21,224), Hispanics ($22,017), Asians ($32,590), and whites ($35,551). This disparity exists even at higher pay levels. For instance, African-American employees who earn $120,000 or more have saved $154,902 in their 401(k) plans compared to $223,408 for white workers in the same pay range. While other factors influence account balances, the variation exists even after these adjustments.

In addition to participation and contribution rates, The Ariel/Hewitt study examined three other factors that can further impact an employee’s 401(k) plan balance–equity exposure, loans and withdrawals.

The findings revealed that African-American workers are less likely than Hispanics, whites and Asians to invest in equities. African-Americans had two-thirds (66 percent) of their 401(k) assets invested in the stock market. By comparison, whites and Asians had 72 percent and 73 percent, respectively, of their 401(k) plan assets invested in equities. Hispanics had 70 percent of their assets invested in equities. These findings are compelling because the stock market has historically outperformed all other investment options over the long term. It is generally understood among investment experts that employees with long-term time horizons should have a significant amount of their assets invested in equities.

African-Americans are also more likely than the study population overall to have a loan and are more than twice as likely to take a hardship withdrawal from their 401(k) plans. Nearly two of every five African-American workers and almost a third of Hispanic workers borrowed from their retirement accounts compared to just one in five white workers.

By contrast, Asian workers were the least likely to take a loan against their 401(k) plans, with less than one in five doing so. “These statistics are troubling because loans and withdrawals jeopardize long-term financial security to satisfy immediate needs. The impact is heightened during an economic downturn, when unemployment rises and withdrawals and loan defaults increase. We now realize this risk is magnified for African-American and Hispanic workers based on the results of our study,” said Barbara Hogg, principal at Hewitt Associates and co-leader of The Ariel/Hewitt Study.