Is Income the No. 1 Driver of Retirement Outcomes?

Data from a joint effort led by Defined Contribution Institutional Investment Association, the Aspen Institute Financial Security Program and the Morningstar Center for Retirement and Policy Studies has revealed that what most leaders believed to be true about retirement accounts—that income levels are the primary driver of differences in retirement savings outcomes—is a misconception. When controlling for income, we see that there are still striking differences in retirement outcomes among different demographic groups.

The Collaborative for Equitable Retirement Savings examines our defined contribution system and how this powerful system—with more than $10.4 trillion in assets—can better support all employees. As one of the largest sources of household wealth, the U.S. retirement savings system is a critical driver to generate wealth for all households. In addition to analyzing demographic and plan data to an extent not achieved before, the project has brought together employers, recordkeepers, consultants, advisers, advocates and racial equity experts, along with a leadership advisory group that provides expert insights from a diverse array of perspectives.

Beginning with customized, individual plan analysis and eventually building to a larger universe of data across industries, the CFERS initiative is a first-of-its-kind platform for research and action that examines workplace retirement savings at the transactional level, merging anonymous employee demographic data with transaction-level details. With this combination of data and insights, we will be able to test the power of various solutions to improve the savings outcomes for workers across race, gender and generation.

What We’ve Learned So Far

Our initial findings highlighted significant gaps between demographics in account balances and plan outcomes. The depth of the insights stem from holding variables like age, tenure and salary constant. We uncovered that critical issues are not limited to income gaps:

• The ratio of average account balance to salary for Black men is 25% below the average balance, while Asian women are nearly 30% above that same average;
• Disparities in employee contribution rates show that Hispanic women contribute 9.3% less than the average employee, while their male counterparts contribute nearly 2% more than the average employee; and
• Black women are 85% more likely to take out a pre-retirement withdrawal than the average participant, which has been shown in our analysis to be a main driver of account balance disparity.

Furthermore, we projected how much implementing solutions to prevent pre-retirement withdrawals would help mitigate account balance disparities. These projections found that Black women’s ratio of account balance to salary would increase by 33% and Black men’s by 15%. Even these preliminary projections demonstrate the tangible impact that plan providers can have with targeted solutions based on CFERS findings.

The CFERS Universe Starts With Data

Throughout 2023, CFERS has been linking anonymized employee-demographic information with DC plan recordkeeping data to provide free, customized analysis to help plan sponsors understand how their plan participants are performing across demographic groups. The comprehensive analysis includes de-identified information such as age, gender and race, among other components, to strategically hold other variables constant, pinpointing key influences of disparate participant outcomes.

Morningstar’s Center for Retirement and Policy Studies serves as the hub for data analysis, collection and storage. All data is on a separate server, compartmentalized from other data, and cannot be accessed outside of the team. All data is fully anonymized and will only be aggregated in larger CFERS universe findings.

As more plan sponsors, consultants, advocates, HR leaders and recordkeepers participate in this effort, the analysis is poised to reveal targeted, helpful insights to craft transformative solutions across the system. The CFERS universe is already composed of more than 300,000 employees, with the numbers likely to double within the next few months. As more employers join the coalition to access their plan analyses and understand their own diverse workforces and how their workers are interacting with their benefits, the diverse dataset could allow us to segment plan outcomes with specific factors in mind, such as industry, health, marital status, military status, households that support elderly parents or younger generations and more.

It Doesn’t End With the Numbers

Data plays a pivotal role in understanding how and why the system is not producing the same savings outcomes for all workers, but data is only the foundation for the work ahead. An overarching objective of this initiative is to establish a long-term collaboration among all industry stakeholders, those who have provided data and those who have taken a leadership role in catalyzing change. Through the ongoing collection of annual data, the scope of the CFERS universe will expand, thereby capturing the evolving impact of implemented solutions on plan outcomes for participants.

This opportunity to leverage data helps individual companies in supporting their workforces and holds the potential for large-scale impact on market and policy solutions as well. Not only can this kind of targeted, purposeful data aid plan design and program innovation, but the long-term observation of the data can provide a way to test effectiveness and impact that has previously never been measured.

Finally, the most important aspect of the CFERS initiative is the community we aim to support. We are planning events, leadership gatherings and in-person discussions to share what we have learned. As this project grows, we hope the ongoing conversation and collaboration will lead to improved outcomes for all.

How to Get Involved

• Plan sponsors: Contribute your de-identified information to the universal dataset and receive your own private, customized and detailed plan analysis on your own workforce, including how your plan stacks up to the universal dataset.
• Recordkeepers, advisers, consultants and other service providers: Introduce your plan sponsor clients and partners to this opportunity and support their participation. Consider how you can use this upcoming publicly available and anonymized CFERS universe of data to build recommendations to strengthen benefit offerings and support dynamic workforces.

 Pam Hess is the executive director of the DCIIA Retirement Research Center, Bailey Epperson is a research project manager; and Simone Lamont is a research project coordinator.