As significant race and gender disparities in 401(k) account balances persist, the The Collaborative for Equitable Retirement Savings found in a recent research study that a key factor perpetuating the savings gap is workers taking early withdrawals from their accounts. 

Examining income and tenure alone does not provide a full picture of why disparities in account balances across gender and race continue to widen, with white workers accumulating hundreds of thousands of dollars more in retirement savings on average by the time they retire, according to the report. 

The Defined Contribution Institutional Investment Association, along with Aspen Institute Financial Security Program and Morningstar Retirement, launched a joint initiative—The Collaborative for Equitable Retirement Savings —to “examine the dynamics of DC retirement savings and identify disparities in outcomes based on race and gender.” 

The dataset used for the analysis consisted of 2022 data from nine 401(k) plan sponsors. In each case, the typical 401(k) plan administrative data from the recordkeeper was merged with human resources data from the plan sponsor to provide information on race and gender. This resulted in a dataset of 180,684 active plan participants, each with a positive account balance and under age 65. 

Gaps in account balances between workers of different races and ethnicities were particularly large for workers closer to retirement.  

Controlling for salary, tenure and plan effects, the predicted margins of account balance to salary for the youngest cohort studied (ages 25 to 29) fell within narrow range, whereas for those nearing retirement (ages 55 to 59), the gap widened considerably. Both Hispanic men and women significantly lagged behind their white counterparts as they aged, CFERS found.  

The Impact of Early Withdrawals 

Pam Hess, executive director of research at DCIIA, explains that as many older participants did not have access to features like automatic enrollment in 401(k)s when they were earlier in their careers, their savings grew more slowly and compounded less over time. On top of that, Hess says taking hardship withdrawals is setting a lot of participants back.  

“If you take those [401(k)] dollars out of the system, you’re charged penalty taxes, and those dollars don’t go back into the system, so it becomes this impact that then perpetuates and grows larger,” Hess says.  

Hess recognizes that for some participants, their 401(k) accounts might be the best source for accessing needed funds before retirement. As more employers are starting to add emergency savings accounts as part of their benefits offerings, Hess says this could potentially help mitigate the preretirement withdrawals that are detrimental to account balances.  

According to the data, at ages 55 to 59, Black women were more likely to withdraw money in 2022 than any other group, and Black men were the second mostly likely to do so. Black workers were also found to take larger portions of their accounts out in withdrawals than did white workers. 

In addition, in the 55-59 age range, Black men and Black women were more likely to have had a loan outstanding than any other group. Also, at ages 40 to 44, Black men were more likely than Black women to have an outstanding loan (43% versus 40%), and Hispanic men had a 37% probability of having an outstanding loan.  

Loans vs. Hardship Withdrawals 

Hess argues that loans are not as big an issue as are hardship withdrawals, as loans repaid automatically out of workers’ paychecks. However, she says things get more complicated if an employee terminates their employment while repaying their loan because the loan repayment can be accelerated and forced to be repaid quickly, in full, which can then lead to a hardship withdrawal.  

“[From] my perspective, if you could take a loan or a hardship withdrawal, the loan is always going to be a better decision because you’re able to pay that back and it’s not subject to penalties,” Hess says. “[The 401(k)] might be the best source [some participants] have in terms of access to their dollars, and [taking a 401(k) loan] is better than getting [a] payday loan or something that is going to be egregious and potentially hurt them from a financial wellness perspective.”   

CFERS also created a simulation in which all preretirement withdrawals were eliminated without any secondary effects on participation, contributions, loans or asset allocation. Results from this simulation indicated that eliminating preretirement withdrawals would substantially mitigate race and gender disparities, particularly for early- and mid-career 401(k) participants.  

For example, the average simulated account balance-to salary-ratio for Black men was only 49% of the overall average for the age cohort if preretirement withdrawal probabilities are used. However, if the preretirement withdrawals are excluded, the value for Black men increases to 83% of the overall average. 

CFERS is currently working on phases three and four of this research project and plans to create a simulation that factors in Social Security benefits and defined-benefit plan accruals. Phase four of the project will focus on analyzing the impact of various legislative or plan design modifications based on the simulated disparities from phase three, which is expected to be published later this year.