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Three ways to close the retirement gap for Black, Latino savers

Automatic enrollment in retirement accounts and help with emergency savings efforts are among the moves that would help close the gap on retirement savings among Black and Latino employees, a new study found.

During the COVID-19 pandemic, Black and Latino workers, in particular, experienced greater pay cuts and job loss, leaving little room to consider retirement savings as a priority.

U.S. Census data from 2020 showed that Black Americans were twice as likely as white Americans to be living in poverty, with a median Black household earning just 61% of the median white household.

“Over the last several years, employers have increased their focus on driving greater inclusivity, which has led to positive outcomes in the recruitment and retention of a more diverse workforce,” said Rob Grubka, chief executive of workplace solutions at Voya Financial Inc

“However, despite the efforts … the dimensions of a strong retirement plan, such as participation and savings rates that can drive these outcomes, still remain a challenge for many individuals today, particularly among certain employee communities,” Grubka said.

Voya’s research found differences in overall workplace retirement plan participation, savings rates for retirement and average retirement account balances among different employee communities. 

Voya’s research found employee participation rates of 53% (Black employees) and 45% (Latino employees) compared to higher averages of 66% (white employees) and 62% (Asian employees).

While overall a savings rate of 8% existed across all employees, Voya’s research revealed savings rates among Black (7.1%) and Latino (6.9%) employees are still less than that of Asian (9.5%) and white (8.4%) employee populations.

Voya’s research also found disparities in average retirement account balances, with white and Asian employee populations showing an average balance of $99,000 and $86,000, respectively; and $45,000 and $43,000 for Black and Latino employees, respectively.

Even small gaps in retirement savings today will expand over a person’s working years and negatively impact their ability to build sufficient income for retirement, Voya said. 

To understand how these gaps may affect retirement outcomes, Voya analyzed the average balance, average savings rate, average age and average salary of Black and Latino participants. 

Voya calculated an expected overall average monthly retirement income shortfall of $432 — or nearly $5,880 a year for Black participants — and a shortfall of $460, or nearly $4,812 a year for Latino participants. This gap may require Black and Latino employees to either delay retirement or cut back on their retirement lifestyle expectations, Voya said.

Auto-enrollment is key

Black and Latino employees with access to an auto enrollment retirement plan have a participation rate two-to-three times higher than peers at employers who don’t have auto enrollment, Voya found.

“Auto enrollment features are super powerful in increasing savings rates,” Tom Armstrong, Voya’s vice president, customer analytics and insight, head of the Behavioral Finance Institute for Innovation.

Specifically, employer plans that lack automatic enrollment had active participation rates of 49% (white employees), 46% (Asian employees), 34% (Latino employees), and 31% (Black employees). 

In comparison, those plans that did automatically enroll employees showed far greater active participation rates of 92% (Asian employees), 90% (White employees), 88% (Latino employees), and 87% (Black employees).

Under SECURE 2.0, a batch of new U.S. retirement rules signed into law late last year, employers who set up new plans will soon have to add auto-enrollment features, but those with existing plans won’t. 

In addition to auto-enrollment, companies need to work on re-enrolling employees who stopped saving by finding out why and seeing how you can help them to save for retirement again, Armstrong said.

Emergency savings help

Emergency savings is another area where companies can help their employees. The lack of such funds can have a snowball effect on savings. Insufficient emergency funds make it more likely that employees will take hardship withdrawals or loans from their retirement plan. 

Voya found that two in 10 individuals have less than three months of emergency savings and three in 10 have no emergency savings at all. Only 28% of individuals have six or more months of emergency savings. Voya data also shows that participants with inadequate emergency savings were 30% more likely to decrease retirement plan contribution rates.

Black employees were more than twice as likely and Latino employees were almost one-and-a-half-times more likely to take a loan or hardship withdrawal than white employees, Voya found.

Employers can help their employees by educating them on the importance of emergency savings and providing planning tools to help with household budgeting and spending strategies, Voya said. In fact, 80% of Black and Latino participants were interested in a workplace emergency savings plan versus 60% of white participants. 

Help employees manage student debt

A 2022 EBRI Workplace Wellness Survey found that 8 in 10 employees described debt as a problem, with student loan debt the second largest debt category, trailing only home mortgages. 

Voya research showed that 63% of Black individuals and 56% of Latino individuals are interested in workplace student loan debt management programs, versus 31% of white individuals.

Employers need with work with their Black and Latino employee resource groups to find better ways to communicate, help and problem solve, Armstrong said.

“Talk about what are some things getting in the way? Have deep and meaningful discussions to help close the gaps,” Armstrong said. “This is complex. It’s not one level. It’s a multifaceted problem.”

This story originally appeared on Marketwatch

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