How retirement plan design can address the racial and gender retirement savings gap

CHICAGO--(BUSINESS WIRE)-- The Collaborative for Equitable Retirement Savings today published its first report, “Racial and Gender Disparities in 401(k) Account Balances: How Large are They and What is Causing Them?” It examined anonymized 2022 data from nine 401(k) plan sponsors across approximately 180,000 active plan participants and found that, even after controlling for salary and tenure, significant race and gender disparities remain in account balances. The report attributes those differences to variations in contribution, loan, and preretirement withdrawal behavior.

The Collaborative—including Morningstar Retirement, Defined Contribution Institutional Investment Association (DCIIA), and the Aspen Institute Financial Security Program—was formed in 2023 as a multi-stakeholder initiative to understand the complex decisions of savers and make retirement savings more inclusive and efficient.

Additional findings from the first report include:

• Black and Hispanic females contribute lower percentages of their salaries than their counterparts after controlling for age, salary, tenure, and plan design variables.
• Black and Hispanic workers withdraw a larger portion of their account balances before retirement and take these preretirement withdrawals more frequently than their white counterparts. These differences grow more extreme the closer people get to retirement.
• Black participants have a higher probability of having an outstanding loan than their white counterparts. At ages 55-59, both Black men and Black women have a 49% probability of having a loan outstanding.
• The report’s simulation results indicate that eliminating preretirement withdrawals would substantially mitigate race and gender disparities, particularly for early- and mid-career 401(k) participants.

“It’s well known that there are racial and gender disparities in retirement account balances, but these disparities are not fully explained by different economic circumstances such as income or tenure,” said Jack VanDerhei, director of retirement studies for the Morningstar Center for Retirement & Policy Studies and the report’s lead author. “This paper is the start of a multi-phased effort to model the effects of these disparities and test the effectiveness of different steps employers and policymakers could take. Our initial findings suggest that reducing preretirement withdrawals can significantly narrow racial and gender disparities in 401(k) outcomes.”

“Through CFERS, we are working to ensure that retirement plan participants can reach their retirement and broader financial goals. Examining the retirement savings data, and the underlying behaviors, around the existing disparities has unveiled preliminary insights that will help the retirement savings system evolve to address the racial and gender wealth gap,” said Lew Minsky, president and chief executive officer of DCIIA.

“Retirement savings are the second largest source of household wealth in the U.S., which means that our efforts to close larger racial and gender wealth gaps require a retirement savings system that works for everyone,” said Karen Biddle Andres, director of impact strategy and partnerships at the Aspen Institute Financial Security Program. “This report signals that minor plan and benefit changes can likely translate to significant increases in the retirement savings balances of Black and Hispanic households in particular. Continuing this level of cross-sector collaboration, testing, and innovation will help our retirement savings system realize its promise in Americans’ financial lives.”

The Collaborative’s first publication is focused on its first two of five phases of analysis. The five phases are: identifying existing racial and gender disparities in account balances after controlling for salary and tenure; identifying the causes of such disparities by analyzing race/gender differences in participation, contribution, asset allocation, and loan and preretirement withdrawal behavior; incorporating a stochastic accumulation model to show how these disparities will evolve by retirement age; focusing on how plan design, benefit, and policy changes are likely to influence disparities; and incorporating the stochastic decumulation module from the Morningstar Model of U.S. Retirement Outcomes to allow for the analysis of various risk management techniques. A summary of the first report can be found here.