A new study released today is shifting the way participant data is collected across the retirement planning industry.
The research comes from the Collaborative for Equitable Retirement Savings (CFERS), a consortium including Morningstar Retirement, the Defined Contribution Institutional Investment Association (DCIIA) and the Aspen Institute Financial Security Program. It highlights gender and race-focused defined contribution (DC) administrative data typically found in human resource (HR) systems, with the hopes of combining it with qualitative research to better assess wellness platforms and tools for employers and participants.
According to the research, data on nonwhite households remains relatively small with limited information on contributions, loans, and withdrawal and asset allocation activity.
How data is housed between different systems also presents a challenge. Findings on race and gender are generally self-identified through the employer and the HR system but are not collected in the same location as recordkeeping data, explained Pamela Hess, executive director at the DCIIA Retirement Research Center, in an interview with 401(k) Specialist. The disconnect deters plan sponsors from gathering both sets of data and designing a workplace retirement plan based on the research, rather than assuming what benefits are best for employees.
The new structure offered by the Collaborative for Equitable Retirement Savings group would combine both sets of data. The group hopes it could lead to more informed decisions on financial planning design that are not based on assumptions, especially as more data is collected in the future.
“We really created it to build a platform that brings people together to see the importance of gathering the data,” added Hess. “We can better assess where we are, and then overtime can also see how those ideas influence behavior. We really built it to be able to work together and get plan sponsors, policymakers, organizations, etc. to understand what are good solutions that can help folks.”
A look at the research
The study, which consists of 2022 data from nine 401(k) plan sponsors, analyzes disparities in 401(k) account balances among different racial and gender demographics and aims to identify what is causing the gaps.
“We really built [the study] to be able to work together and get plan sponsors, policymakers, organizations, etc. to understand what are good solutions that can help folks.”
Pamela Hess, DCIIA Retirement Research Center
The research finds that even when considering salary and tenure, Black, Hispanic, and female workers were likelier to report lower average account balances. These differences stem from a variety of contribution, loan, and preretirement withdrawal behavior, the research finds. For example, Black and Hispanic workers withdrew a higher amount of their 401(k) account balances more frequently than their counterparts and were more likely to have an outstanding loan. According to the CFERS, at ages 55 to 59, Black men and Black women had a 49% likelihood of having an outstanding loan.
Salaries also tended to be smaller for Hispanic and Black workers, with Black male and female employees averaging the lowest salaries across all age cohorts.
Linking employee demographic information to DC-recordkeeping data could lead to better understanding of how plan design and participant behavior causes disparate conclusions, noted Jack VanDerhei, director of Retirement Studies at Morningstar.
“Now we’re able to look at these really important disparities, and not just how large they are or what’s causing them, but most importantly, what we can do in the future to mitigate some of those,” he said.
Next steps
The study consists of just two phases out of five and will next include a simulation of 1,000 replacement rates for all active participants for a range of retirement ages and compare the results across gender and race/ethnicity categories while controlling for mid-career hires.
Phase four will show how legislative and regulatory proposals as well as plan design modifications can be used to mitigate gender and race differentials, while phase five will use the Morningstar Model of US Retirement Outcomes to provide a “stochastic simulation analysis during the decumulation period.” “This will allow for the analysis of various risk-management techniques for longevity risks, postretirement investment risk, and potential catastrophic long-term care expenses,” the CFERS said.
The group is also offering free assessments that consist of the five phases for plan sponsors looking to better comprehend participant behavior.
“There’s a real tie in to employers and financial wellness solutions. By looking at their demographics in different ways like this, it can help them better understand what might be most beneficial to their workforce,” added Hess.
Ultimately, the CFERS hopes the data will help plan sponsors, among other groups, assist employees in mitigating behavior. Preliminary analysis on upcoming legislation, like the Saver’s Match in 2027, shows that it could partially lessen existing disparities across racial groups by as much as 30%. While employers are still responsible for providing education and communication features, having access to this data is integral to kickstarting benefits.
“It’s going to be up to the plan sponsor to educate their employees to take advantage of this, and I think there’s going to be a huge communication effort required in some cases,” said VanDerhei. “But I think providing the plan sponsors with this tangible evidence is going to be incredibly exciting and important.”
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