5 Ways Employers Can Improve Retirement Readiness for Underserved Participants

In order to bolster retirement savings for underserved workers, employers can take advantage of a wide array of plan features and strategies designed to improve retirement readiness. 

In a new white paper, Alight Solutions outlined numerous ways employers can make retirement savings more accessible for workers from racial and ethnic minorities and the LGBTQ+ community, all of whom have historically fallen behind in saving for retirement. 

Embedding Financial Wellness in Plan Design 

According to the Survey of Consumer Finances, white families typically have more than four times the amount of emergency savings as families of color, and 36% of white families would be able to cover six months of living expenses, compared to just 14% of Black families and 10% of Hispanic families. 

As a result, people of color in 401(k) plans are more likely to take out a loan from their account to pay for an emergency expense, further hurting their retirement readiness.  

Additionally, only about half of LGBTQ+ respondents said they would be able to get by without disruption if they had a sudden expense of $500, compared to 63% of the general population, according to Alight. There is also evidence that LGBTQ+ individuals have a harder time getting approved for bank loans, such as for a mortgage. 

Alight suggested that employers offer in-plan features like after-tax contributions that allow workers to access their savings without as many penalties and restrictions as before-tax accounts. The SECURE 2.0 Act of 2022 also included two optional provisions that would allow for participants to grow emergency funds in a sidecar account or to withdraw $1,000 from their retirement account per year with no penalties. 

An out-of-plan program dedicated to helping workers establish emergency savings can also be effective, according to Alight. 

Include DEI in Investment Selection Process 

Examining the culture and diversity of the asset managers represented in an employer’s 401(k) plan can also be a way to build employees’ retirement readiness. 

Alight’s paper pointed to evidence that investment managers with strong initiatives to enhance diversity and inclusion outperform their peers. For example, the Knight Foundation found both women-owned and minority-owned firms are overrepresented in top-quartile performers among mutual fund companies, hedge funds and private equity managers.  

With growing interest from Gen Z and Millennial participants in ESG investments, employers may want to consider including investments from diverse managers as an option in the plan. 

Communication Should Reflect Diverse Population 

When communicating about benefits and retirement to diverse groups of employees, it is important to establish standards for inclusive language, according to Alight. 

Using visual storytelling that features people from a range of races, body types and ages in photos is also an effective way to connect to participants. 

Alight found it crucial to “go mobile” with communication, as most people have access to a smartphone. Communications that cannot be accessed on mobile devices run the risk of excluding underserved populations. 

Tweak Matching Formula 

While features like automatic enrollment have helped close the gap between white and non-white participants in retirement plan contributions, significant disparities remain. 

Alight suggested that employers can provide workers with a contribution not tied to a match or can tweak their matching formula to help keep costs consistent with the current formula. For example, instead of offering a $1 for $1 match on 6% of pay, an employer could provide a $0.50 per $1 match on 6% with a 3% non-elective contribution. Plan formulas can also be tweaked to provide the non-elective contribution to more vulnerable populations, such as workers earning under a certain pay threshold. 

Employers may also consider implementing an automatic enrollment “sweep,” which would enroll non-participants into the plan unless the individuals opt out. 

Facilitate Auto-Portability 

Many people have a tendency to cash out their retirement savings when they change jobs, particularly workers with smaller balances. Yet this significantly hurts overall retirement readiness. 

By working with recordkeepers in Retirement Clearinghouse’s Portability Services Network—a consortium of retirement plan service providers seeking to help workers transfer low account balances from one employer plan to the next—employers can help participants avoid early cash-outs. 

While less than one-third of all defined contribution retirement plan participants cash out small balances, 57% of Hispanics and 63% of Black participants cash out their small balances, according to Retirement Clearinghouse.  

The country’s five largest recordkeepers by assets are now part of the network, including Alight, Principal, Fidelity Investments, Empower and Vanguard.