Data & Research October 14, 2007

Survey Shows Racial Divides in Investing and Saving

Even when all other significant demographic factors were held constant - things such as age, income, gender, and education – Whites were nearly twice as likely as African-Americans to be investors.
Reported by

Although studies routinely suggest that Americans aren’t saving enough to assure a dignified retirement, according to the 10th annual Black Investor Survey by Ariel Mutual Funds and The Charles Schwab Corporation, black Americans look to be even further behind. The study found that in a group of 500 Blacks and 508 Whites all earning more than $50,000 annually; the median amount of money saved by Blacks surveyed is less than half of their White counterparts ($48,000 versus $100,000). On a monthly basis, median savings is $182 for Blacks versus $261 for Whites, according to the survey, released today at the first-ever Ariel-Schwab Black Investor Summit in New York City.

Ariel Founder, Chairman and Chief Executive Officer, John W. Rogers, Jr., said he thought the difference in approach was cultural. “You learn about investing money when you have money to invest,” he told the audience.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

While more than half (56%) of Whites say that retirement is their most important goal for saving and investing, only 40% of African-Americans see retirement as their priority. All other things being equal, the study found that African-Americans were 50% less likely to see retirement as their primary saving/investing goal.

Retiree Perspectives

This year, Ariel and Schwab also conducted a first-of-its-kind survey of middle and upper income Black and White retirees to assess their investing behavior and how well they prepared for retirement. Overall, both African-American and White early retirees were happy about their retirement, with just 18% of the former and 11% of the latter rating their happiness as a “5” or below on a scale of 1-10.

However, the survey shows that retired Blacks have median savings of just $73,000 compared to $210,000 for Whites. Blacks, on average, also retired earlier than Whites (59 vs. 61) and are
more likely to be relying on a pension or Social Security rather than a defined contribution plan, such as a 401(k) plan (although 55% of Black investors cited their employer’s 401(k) plan as their impetus to begin investing). However, half of the African-American retirees surveyed were primarily employed by the government, compared with just one-third of the Whites. Consequently, 59% of African-Americans retired before the age of 60, compared with just 47% of Whites.

“The truth is that many Americans are not saving enough to ensure a comfortable retirement,’ said Schwab Founder, Chief Executive Officer and Chairman Charles R. Schwab. “The problem is broad-based; but the 10th anniversary of this research and today’s summit serve as important reminders that the need to better prepare for their financial futures is even more pressing among this underserved segment of our population.’

According to the Ariel-Schwab retiree survey, fewer Blacks than Whites have gone through some of the basic steps of retirement planning, such as calculating the amount of money they need to live comfortably in retirement. However, those who consulted with financial professionals were much more likely to have saved more than $100,000 by the time they retired, and were much less likely to have retired early.

Real Estate Investing

One of the single most consistent findings in the survey, according to its authors, is that more Blacks than Whites view real estate as a better investment than the stock market. In 2007, only a third of Blacks consider stocks and mutual funds to be the best investment overall, while nearly half said real estate was. For Whites, those proportions were reversed.

“Many Blacks think real estate is less risky, because it can be used to earn rental income and assume it will never go down in value,’ the survey said. In fact, nearly half of all working Blacks believe they will rely on rental income during retirement, according to the report. However, in a companion study of retirees, fewer than two in ten actually rely on rental income for their retirement.

The survey, which admittedly concentrates on the perspective of higher income individuals, was first conducted by the two companies in 1998, when 57% of Blacks and 81% of Whites indicated that they owned individual stocks or stock mutual funds. During the past ten years, the number of Blacks who own stocks or mutual funds rose as high as 74% (in 2002) only to fall back to 57% again this year, while White participation has consistently hovered within a few percentage points of 80% (though it had dipped to 76% in the most recent data).

“The data is troubling because it suggests that barriers to investing are just as formidable as they were a decade ago. Our industry and our community must address this challenge aggressively,’ said Ariel President Mellody Hobson, adding, “Government and employers also play a crucial role.’

Ethnicity Survey

Data presented by Great-West Retirement Services at the Summit outlined a three-pronged problem; lower incomes (black men made 20% less than their white counterparts), smaller contributions (black men contributed 58% less than their white counterparts), and more conservative investments (1.7 funds versus 3.6 funds out of 21 options available). That led to account balances that were 75% smaller in the random sampling of some 20,350 participants from Great-West Retirement Services’ proprietary defined contribution recordkeeping system, despite the fact that black men worked, on average, 33% longer, according to Charles Nelson, Senior Vice President, Great-West Retirement Services. African-American females earn 8% less, contribute 31% less, and have account balances that are 66% smaller, on average, despite 27% more years of services.

The survey, which was noted that the average deferral rate by Asians in the survey was 5.9%, compared with 4.7% for Whites, 4.0% for Hispanic participants, and just 3.0% for African-American. African-American females in the sampling deferred 3.3%, on average, nearly twice the 1.9% rate of African-American males, but significantly less than the 4.8% deferred by White females and 4.5% by White males.

Another interesting divergence emerged in the types of distributions taken. While nearly a third of Whites (31%) rolled their distribution into an IRA, only 4% of African-Americans did. On the other hand, while 7% of African-Americans rolled over their distribution to another qualified plan, just 4% of Whites did. More than half (61%) of African-Americans took their distribution as a lump sum distribution, compared to “just” 50% of Whites. The survey also noted that Hispanic participants were much more likely to have a loan against their DC accounts (24.2%) than were African-Americans (15.3%), Whites (11.5%), or Asians (9.6%).

The study, Defined Contribution Trends by Ethnicity, included participants from both 401(k) and 403(b) plans, and was prepared by KK and Company.

——————————————————————————–

For the conference, Ariel and Schwab published “The Ariel-Schwab Black Paper: A Decade of Research on African-American Wealth Building and Retirement Planning.” The report is available online here.

IMHO October 13, 2007

IMHO: Why Knots

We spend a fair amount of time worrying about the relatively small percentage of workers who choose not to participate—at all, fully, or effectively—in their workplace savings plan.
Reported by
Well that we should, because for a myriad of reasons, they are letting a great opportunity pass them by.
However, the real crisis, IMHO, is not about the minority that we hope to stir to action with devices like automatic enrollment, tailored communications, and personal advice. Rather, the real crisis is the majority of American workers who lack even the opportunity to participate in a workplace retirement plan. Certainly, those people are on politicians’ minds, as evidenced by last week’s proposal by Senator Hillary Clinton that purports to provide “universal access to a generous 401(k) for all Americans.’ Now, you can argue whether tax credits for the middle- and lower-income workers targeted will be enough to motivate them to take action, and you can certainly take issue with the price tag (and if we know nothing else about politicians of all stripes, it is that those cost projections are always “optimistic’)—but it’s hard to take issue with the need to expand the opportunity to save for retirement to everyone.
And yet, in the interests of laudable goals like “transparency,’ “fairness,’ and “accountability,’ we have nonetheless managed to regulate private-sector retiree health care nearly out of existence, to relegate the support of private-sector defined benefit plans to the sidelines—and we are well on the way to doing the same in the public sector. In fairly short order, our once-vaunted three-legged stool now totters on the financial viability of Social Security and the ability and willingness of individual American workers to make the proper preparations.
It has its imperfections, but it’s clear that the employer-sponsored system works. We may fret about 75% participation rates, but left to their own devices—without the financial support, structure, and education of the employer-sponsored system—individual savings rates are appallingly low. We may well worry about the lack of revenue-sharing transparency and “excessive’ fees paid by 401(k) plan participants, but have you taken a look lately at what you would pay for to open a retail IRA that offers a fraction of the services in your 401(k)?
As effective as that employer-sponsored system has been—as essential an element as it surely is in ensuring the retirement security of millions—we continue to undermine the willingness of employers to carry the burden. Somewhere along the way, we seem to have lost sight of the fact that these programs are voluntary, in every sense of the word. They cost money, they take time, they are subjected to an ongoing barrage of change—and, of course, there’s the ever-present threat of litigation.
Yet, we seem to expect employers to continue to support these programs, an expectation that, IMHO, borders on arrogance in view of the burdens imposed. Sure, they attract and, perhaps, allow us to retain good workers—and certainly there are modest tax incentives. But in a time when companies are driven to focus on their “core competencies,’ surely we must find some more-meaningful ways to encourage those who have made the commitment to stay the course—and some compelling financial rationale for employers that have resisted the pull to join in.
We all know well why we need the employer-sponsored system. What is less obvious each day—is why a rational employer would be willing to take on the headaches currently imposed by that system.

«