SmartMoney Blogs

A blog about living in and planning for retirement

Auto-Enrollment Cuts Racial Retirement-Savings Gap


The retirement savings picture isn’t pretty — especially for minority groups. The average 401(k) balance across all ethnicities is just $74,900, according to Fidelity — a number that for most people, especially older investors, is far short of what advisors recommend. What’s more, “regardless of age and income, African-American and Hispanic workers are less likely to participate in their company 401(k) plans, and when they do contribute, they save at much lower rates than whites,” a study by financial firm Ariel Investments and HR consulting firm Hewitt Associates finds. Among individuals who make between $30,000 and $59,999, blacks had an account balance of $21,224 and Hispanics of $22,017, compared to a full $35,551 for whites.

So what can be done to increase overall savings rates, especially among minority groups?  A new study by Vanguard suggests that companies automatically enrolling their employees in 401(k) plans might help. The report found that automatic enrollment not only increases participation levels across all ethnic groups, but it increases participation most dramatically for blacks and Hispanics.  Whereas before automatic enrollment, just 57% of blacks and 67% of Hispanics (compared to 73% of whites) were putting money into their 401(k) plans, after automatic enrollment was instituted a full 94% and 95%, respectively, were. Furthermore, this jump in participation ends up eliminating almost all ethnic disparities in 401(k) participation, the study concludes.

While these findings are certainly promising, they don’t mean that automatic enrollment is a cure-all for our retirement savings woes.  For one, most companies auto-enroll employees at low savings rates, typically far less than the 10% of our income or more that advisors say we should save each year.  (And 401(k)s tend to be one of the most significant retirement savings assets for consumers.)  Second, automatic enrollment doesn’t mean that workers have proper asset allocation in their portfolios, a fact that can put all of that savings at risk.

Still, it’s a start. “This study confirms that the use of automatic plan design does reduce racial and ethnic disparities in saving and investing behavior through defined contribution retirement plans,” said Cyndy Pagliaro, a Vanguard researcher and lead author of the report, in a statement. “Plan sponsors concerned about these disparities should consider automatic plan design, but it must be carefully planned to ensure adequate long-term retirement savings for all groups.”


We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (0)

    • Be the first to leave a comment on this blog.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.