Who Is Most at Risk for Retirement Savings Shortfall?

In July, Morningstar Inc. researchers Jack VanDerhei and Spencer Look released a new model to measure U.S. retirement outcomes.

VanDerhei, Morningstar’s director of retirement studies, has worked on such retirement models for decades, including during a long run as research director for the Employee Benefit Research Institute. The new model, he says, has the advantage not just of updated public data, but also proprietary plan-level data.

“We’ve got such explanatory power now once you get into the [defined contribution] plan,” he says. “It’s way beyond just age, wage and gender. We can look at the plan provisions.”

Look, associate director of retirement studies at Morningstar, says the model helps forecast long-term outcomes because it considers real-world circumstances such as job changes, marriages, separations and managing long-term care needs. The team is “projecting life paths for a representative sample of the US population, and simulating as much as we possibly can to reflect the reality of people’s lives.”

The results, in many ways, show promise. The DC system can and is working for millions of Americans. But the story is not the same for all groups. Women are more at risk for retirement income shortfalls than men. Single women are more at risk than women with families. Most starkly, Hispanic and non-Hispanic Black Americans are more at risk than their non-Hispanic white counterparts.

According to the Morningstar findings, more than half of Hispanic Americans (61%) from the ages of 20 and 64 are projected to run out of money in retirement if they retire at 65. That figure is similar for non-Hispanic Black Americans: 59%. The situation is much better for non-Hispanic white Americans and non-Hispanic other Americans, such as Asian Americans, who, combined, show a 40% shortfall risk.

At Risk

What is behind this disparity? There are many factors, and VanDerhei and Look are planning future research to examine that question. But Look and other researchers point to, first, access to a DC plan, and, second, the ability to stick with it.

“Participation will ultimately matter,” he says. “For people who are actually participating and saving in a plan, there is a clear difference … and access rates do, of course, play a part in that, as to whether or not you are able to participate.”

In the report, Look and VanDerhei found that retirement-funding ratios were dramatically better for people able to access and participate in a DC plan for at least 20 years. Specifically, 57% of those not participating in a DC plan ran short of money, compared with 20% of those participating.

Christian Weller, a professor of public policy at the University of Massachusetts Boston’s McCormack Graduate School of Policy and Global Studies, led a research project published in April looking at retirement wealth by race and ethnicity. During a webinar held Wednesday by the National Institute on Retirement Income to discuss the report, Weller emphasized that when people of any ethnic or racial group have the chance to save in a workplace retirement plan, they mostly do it.

“The findings show that when people are eligible for plans, 90% to 95% of people, regardless of race, will participate,” he says. “What that ultimately means is the inequalities we see are the result of structural issues—they are not the consequences of individual failings. … Access is a major part of the gap.”

Unequal Access

Black and Hispanic households, the research found, have unequal access to employer-sponsored and tax-advantaged plans, and even when those plans are offered to eligible employees, both groups are less likely to qualify for the benefit.

In addition, when Black and Hispanic individuals do have plan access, there is a higher chance mitigating factors will erode the long-term success of contributing, according to Weller.

For one, higher liquidity needs for daily living—including things such as helping family members—“reduce rates of return.” This need for cash can lead to higher rates of taking loans or withdrawals, lower equity allocations and shorter-term financial decisionmaking out of, in short, necessity.“Greater liquidity comes at the expense of slower account balance growth,” Weller said during the webinar.

In addition, he argued, these groups face a higher risk of economic disruption than their non-Hispanic white counterparts and higher costs associated with those risks. For instance, Black and Hispanic Americans are more likely to experience long spells of unemployment and unexpected demands from family members. They also, Weller notes, have greater chances of dealing with costly health issues and higher rates of incarceration for family members.

Sharon Carson, executive director and retirement strategist at J.P. Morgan Asset Management, commented on joint research with EBRI on the effect these “spending spikes” have on retirement savings. Even for those making more than the average level of income—$59,384 in the fourth quarter of 2023, according to the U.S. Bureau of Labor Statistics—an unexpected spending spike can hurt long-term outcomes.

“In some cases, your income doesn’t cover it, nor does your savings—so you are scrambling to borrow and going into debt,” Carson says. “That looked almost the same across public and private sector employees.”

Carson says research findings support the increased use of emergency savings programs, whether in or out of plan, so participants have a built-in cushion. More generally, she believes, “access equals savings.” To get more Americans prepared for retirement, they need access to plans with automatic enrollment, automatic escalation and, ideally, financial wellness and emergency savings programs to keep them saving.

“[Outcomes for] people in plans are so much better than [for] those who are not,” she says, pointing to state mandates currently active in about 20 states, according to ADP, as important steps in increasing coverage.

National Program

One legislative effort to mandate coverage nationally will be closely watched after the November elections. The Automatic IRA Act of 2024 was first introduced in February by Representative Richard Neal, D-Massachusetts, with industry watchers saying it could have a chance of passing next year depending on the election results. The legislation would require employers with more than 10 workers to either offer a plan or automatically enroll employees in individual retirement accounts or similar plans.

In a paper published in September and timed to coincide with the 50th anniversary of the Employee Retirement Income Security Act of 1974, VanDerhei and Look ran an analysis of what would have happened if the Automatic IRA Act passed with opt-out features and automatic escalation.

For the base case scenario, the duo forecasted aggregate average retirement wealth ratios would have increased 23.8% across all groups. For the Hispanic and non-Hispanic Black individuals currently not seeing as much advantage from the current system, it would have been particularly impactful.

For Hispanic savers, wealth ratios would have increased by an average of 25.8%. Non-Hispanic Black individuals would have seen a similar increase of 26.3%. Non-Hispanic white people, interestingly, would have experienced a lower increase of about 22.9%, further proving that this group is currently better able to take advantage of savings options.

“If we are ever going to get our hands around this access problem, it’s going to have to be something like this [IRA Act] or we wait until the other 30 states do some kind of state auto-IRA,” VanDerhei says. “I, personally, don’t see any other way it’s going to happen.”

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