Retirement Savings Disparity Issues
A study by The Collaborative for Equitable Retirement Savings revealed significant disparities in 401(k) balances across race and gender, exacerbated by early withdrawals.
Contribution and Withdrawal Patterns
Black and Hispanic workers not only contribute less to their 401(k)s but also withdraw funds more frequently, leading to lower account balances compared to white employees.
The Study
Data from nine 401(k) plan sponsors in 2022, encompassing 180,684 active participants under age 65, showed stark disparities. The gap in account balances widened significantly for workers nearing retirement, with Black and Hispanic employees trailing their white counterparts.
Impact of Early Withdrawals
Pam Hess of DCIIA noted that older workers, lacking access to automatic enrollment earlier in their careers, saw slower growth in their savings. Hardship withdrawals further diminish account balances due to penalty taxes and lost compounding.
Black women aged 55-59 were the most likely to withdraw funds in 2022, followed by Black men. Black workers also tended to withdraw larger portions of their accounts than white workers.
Loans vs. Hardship Withdrawals
Loans, while not ideal, are less detrimental than hardship withdrawals as they are repaid through payroll deductions. However, if employment terminates, loan repayments can accelerate, leading to potential hardship withdrawals.
Simulation Results
A CFERS simulation showed that eliminating pre-retirement withdrawals could substantially reduce race and gender disparities in 401(k) balances. For instance, Black men’s account balance-to-salary ratio improved from 49% to 83% of the overall average when excluding early withdrawals.
Future Research
CFERS plans to continue its research, including simulations that factor in Social Security benefits and defined-benefit plan accruals. They will also analyze the impact of legislative or plan design changes on mitigating these disparities.
