Customized Benefits, Financial Literacy Are Key to Closing the Racial Retirement Savings Gap

As the wealth disparity between Black and Latino families and their white counterparts in the U.S. continues to grow, the retirement savings gap between low- and high-income employees is becoming wider, and the data is staggering.

A recent report from the Government Accountability Office revealed that, in 2022, a larger percentage of white households held a retirement account balance than that of any other race, and those accounts held about double the median balance of households of other races.

Income, job-related factors and race were cited as being “strongly related to disparities in older workers’ retirement account balances” in the GAO’s separate analysis of data from the University of Michigan’s 2018 Health and Retirement Study. Households with higher income, longer job tenure and a college education tended to have larger balances, and households of non-white families and households with children had about 28% and 20% percent smaller balances, respectively.

By tweaking plan design, offering an equitable benefits package and providing financial literacy education, plan sponsors have an opportunity to help close the racial retirement gap and encourage participants to contribute to a retirement account.

Slow Progress

Olivia Mitchell, a professor at the Wharton School of the University of Pennsylvania and the executive director of the Pension Research Council, said via email that many plan sponsors are increasingly moving to auto-enrollment and auto-escalation, both of which can overcome inertia’s role in preventing retirement saving. Additionally, Mitchell said several states have adopted auto-IRA programs, in which employers with no retirement plans are required to enroll employees into state-organized Roth IRA plans.

Mitchell added that research shows minorities tend to be more likely to hold debt, which in turn undermines their ability to save for retirement. For example, a report published by the Pension Research Council showed that 30% of older adults in communities of color held delinquent debt, as of August 2022, compared to 18% of those in majority-white communities.

The Pension Research Council also argued that there is an employer and social business case for improving the financial health of workers and addressing racial disparities in wealth, as financially secure workers are more satisfied with their employer, more engaged, more present and more productive.

Employee financial wellness programs that include benefits like health savings accounts, emergency savings accounts and student loan reduction or repayment assistance can all help build participants’ assets overall. But the PRC argued that these programs are not sufficient on their own to close the racial retirement gap, as they do not include mandated minimum benefits for salaried workers, and they often exclude independent, part-time and self-employed workers.

Financial Literacy is Key

Vidhi Sanders, the vice president and head of participant outcomes at Capital Group, is well aware of the racial retirement gap and found a severe lack of financial literacy, across all demographics, when it comes to saving for retirement and making smart financial decisions.

In March 2022, Capital Group announced the launch of ICanRetire, an employee engagement program for plan sponsors, in response to the firm’s conclusion that people were not taking advantage or participating optimally in their retirement plans at work due to a lack of financial literacy.

ICanRetire was originally piloted as a partnership with RWJBarnabas Health, an academic health care system and one of New Jersey’s largest private employers. Sanders said the program started with about 30,000 participants enrolled in the platform and has since grown to more than 400,000.

“The program is essentially a much more inviting way to engage digitally with content, messaging and utility on a website that is completely white-labeled for the plan sponsor,” Sanders said. “We drive people to engage with the site through email, and we’re also testing SMS.”

The program is available to certain plan sponsors through Capital Group/American Funds target-date funds, and it includes features like “one-click access” to an employee’s recordkeeper, “jargon-free” content, advice from personal finance thought leaders, a retirement personality quiz and other interactive tools.

Capital Group also plans to announce new enhancements to the program in September and October that are geared specifically toward Hispanic participants—who lag significantly behind others in retirement savings.

The program currently uses five different personas that represent different age groups, participation rates and other psychographic factors like financial knowledge and investing confidence. These personas are not visible to participants using the program but inform the way ICanRetire creates tailored content and user experiences. Three new Hispanic personas are planned for the platform as part of the upcoming enhancements.

Sanders says it is important to recognize a population’s diverse cultural background and how that impacts the way its people think about money, in addition to translating all pages to make them available in a native tongue.

Creating Benefits Equity in a Union Plan

Joshua Luskin, the managing director of Secure Retirement Trust, a nonprofit retirement plan for home care workers, says he decided to take advantage of the ICanRetire program because he felt it aligned with his plan’s equity mission.

Secure Retirement Trust provides benefits for the Service Employee International Union Benefits Group 775 in Seattle. Luskin says there are approximately 45,000 active caregivers represented by the union, about 85% of whom are women. The population is also disproportionately made up of Black, indigenous and non-white people and includes many with limited English proficiency, he says. Members of the plan speak at least seven different languages.

The SEIU 775 plan only includes employer contributions, as the intent is to create a replacement income stream in retirement, Luskin explains. Participants cannot withdraw funds from the plan but will start receiving installments when they turn 65 years old.

SEIU has a partnership with Washington state to give workers access to IRA providers. One of ICanRetire’s objectives for the union plan was to drive more people to create and contribute to an IRA to supplement what they receive from the union’s defined contribution plan. Luskin says Secure Retirement Trust already was already using Capital Group as its investment provider and felt the firm was well-equipped to help educate workers on retirement planning.

“Investment knowledge is a major hurdle and a retirement hurdle that BIPOC and [limited-English-proficient-workers] get overexposure to, so that’s [why] we set up that relationship with ICanRetire: to get them comfortable and send [those participants] over to the Washington marketplace [to create an IRA],” Luskin says.

Sanders says ICanRetire was able to engage about 55,000 of SEIU’s roughly 80,000 members since launching the program about six weeks ago. ICanRetire also helped SEIU motivate more employees to register an account with Milliman, the plan’s recordkeeper, which many had not done. Luskin says more than 1,000 registrations have occurred and that the plan saw an increase of three to five times in engagement and registration after collaborating with Capital Group.

This is significant progress, as Luskin explains that the bottom two quintiles of SEIU’s population are struggling to save money in general. Many are single mothers with only one income stream. 

“I feel that the major hurdles are that we need more education [for participants],” Luskin says. “The Saver’s Credit is something that is good for low-income [employees], for example, but not many people take advantage of it. You need education about it or about delaying your Social Security payments.”

The Saver’s Credit gives a special tax break to low- and moderate-income taxpayers who save for retirement through 401(k), 403(b), SIMPLE, SEP or governmental 457 plans or traditional and Roth IRAs.

Responsibility to Provide Financial Literacy

Kezia Charles, a senior director at WTW, says employees are increasingly looking to their employers to help with decisionmaking and retirement planning.

“As employers think of different ways of decisionmaking, one tactic that has been used is employee resource groups or affinity groups to help with financial literacy and financial awareness,” Charles says.

An affinity group or employee resource group is a collection of individuals who share a common identity characteristic, anything from gender or sexual orientation to race, nationality or religion.

Charles says plan sponsors often partner with a financial planner or somebody within the human resources department to lead sessions on financial literacy for employee resource groups. She adds that employers often use these groups to educate people on their health benefits, as well.

“We are seeing more and more employers looking at the diversity of financial planners to ensure that people are able to relate [to the planners], so they can have a more meaningful conversation,” Charles says.

Another tactic WTW has seen is including families in the financial education offerings, because for many people, their retirement planning is not solely an individual decision, but one to provide resources for the family.

“We acknowledge and understand that raising [financial] awareness is one approach, but it’s not the only thing organizations are doing,” Charles points out. “You have to look at design, you have to look at participation and look at metrics to understand who’s participating and who’s not participating. Black and Hispanic people generally have less access to retirement plans, and they also participate less even when they have access. So you have to look at ways to increase participation.”