Retirement and the Black-White Wealth Gap
Employers are increasingly focused on the benefits of improving diversity within their workforces. While a focus on pay equity is laudable, employers should also consider the role of their wealth-building programs in addressing racial disparities. Black families’ median wealth is 13% that of white families; other non-white or multiracial ethnicities all fall below the median wealth levels of white Americans. Helping employees to build wealth can mitigate financial stress and improve employee engagement.
Thoughtful design of retirement programs and employee communications ensures all workforce segments have access to meaningful savings programs and can help reduce barriers such as high levels of existing debt. Retirement programs — defined contribution (DC) and defined benefit (DB) programs — are the primary tools employers have today to help employees build wealth. In the U.S., just over 55% of Black families have access to employer-sponsored retirement programs (DC or DB) compared with just under 70% of white families.
As U.S. employers continue to shift their retirement program offerings toward DC-only models, we must look to broader policy reforms to enhance how DC plans effectively serve as the primary retirement savings tool (or determine whether they ever can). In the meantime, we must understand how DB and DC plans currently affect the wealth gap to design a more equitable financial savings journey.
There has been a recent focus on retirement coverage, as evidenced by the passage of the Setting Every Community Up for Retirement Enhancement Act (SECURE). The SECURE Act aims to make it easier for small businesses to offer DC plans, expand coverage to part-time workers, and broaden the path for retirement income options to be offered in DC plans.
Although this is an important step in the right direction, what can employers do today to start closing this gap?
There are several aspects of retirement programs that can contribute to the wealth gap that employers should proactively assess.
Plans can contribute to reducing the racial wealth gap, as public sector employers are more likely to offer DB plans and because Black employees make up a higher percentage of the public sector workforce.
Defined Contribution Plans: Auto-Enrollment May Not Always Be Helpful
Automatically enrolling employees into defined contribution plans is one tool employers use to increase DC plan participation. While auto-enrollment can be an effective and positive forcing function, it may actually harm the wealth accumulation for some. For example, among Black Americans in the upper-income group, 62% consider debt to be a problem and say debt is affecting their ability to save for retirement (compared to 37% for white Americans). Auto-enrollment may limit Black Americans’ ability to set aside funds to pay down debt by directing a portion of their paycheck into a savings vehicle that penalizes withdrawals.
Where Matching Employer Contributions Can Fall Short
Many DC plans also offer a matching employer contribution to drive participation and nudge employees to save more. While this may seem to benefit participants, a match based on employee contribution rates can exacerbate the wealth gap by effectively penalizing those who do not have discretionary income to save. Employees may defer a portion of their payroll to receive the company match at the expense of other, potentially more pressing financial needs, like paying down high-interest debt. Non-matching or non-discretionary employer contributions can benefit the entire workforce regardless of personal circumstances or ability to save.
The Need for Accessible, Relatable Education
Providing accessible, relatable education is another crucial factor in improving the wealth gap. Mercer’s recent assessments of various employee populations found Black plan participants, on average, tend to invest more conservatively than white participants across age cohorts. For Black Americans in the early and mid-stage of their careers, taking on less investment risk could lead to lower returns and diminish the benefit of compounding their savings.
Many employers rely on their DC plan record-keeper to provide education and advice to participants. According to EBRI’s 2021 Retirement Confidence Survey, Black Americans prefer working with a financial advisor who has had similar experiences, and they say one-on-one, personalized education would be helpful.3 Employers looking to support Black participants should consider whether investment education materials address Black participants’ concerns and whether record-keeping staff in call centers match their organization’s demographic profile to foster a better sense of familiarity.
Defined Benefit Plans and Workforce Diversity
DB plans are an essential source of financial security for those fortunate enough to work for an employer that offers such a plan. Studies have shown that retirees who receive a guaranteed monthly income have a higher standard of living than retirees with a comparable level of wealth in account-based plans. Traditional DB plans have provided the greatest value to older and longer-service employees — a demographic in which minorities have traditionally been underrepresented. Given life expectancy for white employees tends to outpace that of Black employees, the value of DB pensions skews toward white individuals who receive benefit payment streams for a longer period of time.
A recent study by the Federal Reserve Bank of Boston found Social Security and DB plans meaningfully reduced certain measures of wealth inequality. DB plans can contribute to reducing the racial wealth gap, as public sector employers are more likely to offer DB plans and because Black employees make up a higher percentage of the public sector workforce.
Private sector employers have been moving away from DB plans, relying increasingly on DC plans to provide retirement. This trend is unlikely to change, and increasing DB plan prevalence in the private sector would likely not have as meaningful an effect on wealth equity as it does in the public sector.
However, some employers may find DB plans have a valuable role in increasing the diversity of their workforce and in contributing to retirement security over the long term. Income replacement and a predictable annuity encourage longer-tenured employees to retire sooner and at more predictable rates. These retirements increase workforce “velocity” — promotional opportunities for other employees — which can be particularly vital for employers looking to encourage diversity throughout all levels of their workforce.
Ultimately, employers may want to explore so-called “hybrid” DB designs, such as cash balance and variable annuity plans. These plan designs combine favorable characteristics of both DB and DC plans and can be tailored to support an employer’s workforce diversity and wealth equity goals.
Expanding coverage to retirement savings vehicles and rethinking the type of retirement program offered (DC versus “hybrid” DB plans) will likely benefit Black and other non-white Americans over the long term. However, near-term actions can also chip away at financial insecurity and the racial wealth gap.
We encourage employers to analyze their employees’ retirement behaviors, demographics and retirement plan use to understand how their design may impact Black participants. Empowering Black Americans to balance their financial priorities could help support their longer-term wealth accumulation and start to make a dent in the wealth gap.