Troubling Trends for Hispanic 401(k) Savers

A closer analysis of 401(k) participants by race and/or ethnicity finds troubling low rates of coverage among the Hispanic population. However, it represents a prime opportunity for 401(k) advisors involved with niche and diversity marketing to help.

“Hispanic workers lag far behind other workers in retirement plan participation,” according to Monique Morrissey of the Economic Policy Institute. “In 2012, just 34 percent of Hispanic workers employed 35 or more hours per week were enrolled in an employer-based plan, compared with 59 percent of their non-Hispanic white counterparts.”

Some workers opt out of 401(k)s and other voluntary plans, she notes, especially if they receive little or no employer match or tax subsidy. A much more prevalent problem is working for an employer that does not offer a plan in the first place, as 59 percent of Hispanic workers do.

“The lack of access to traditional pensions and 401(k)s makes it hard for Hispanics to prepare for retirement and increases their reliance on Social Security and working in old age,” Morrissey adds. “Only a quarter of prime-working-age Hispanic families have retirement account savings and the median balance is just $22,000.”

She concludes that the new state-sponsored retirement plan in California, where a quarter of Hispanics live, could make a difference.

“The new California Secure Choice plan will make it easier for workers without employer-based plans to save. Expanding Social Security would make an even bigger difference to Hispanics, who have longer-than-average lifespans.”

More About Secure Choice:

What This Means for Employers

When the program is operational, Secure Choice would apply to employers, with five or more employees, who do not offer an employer-sponsored retirement plan. Employers who fit this definition will be required to either offer an employer-sponsored retirement plan, or enable their employees to make a direct payroll contribution to the employee’s personal Secure Choice Retirement account.

Employers would have minimal administrative responsibilities. They would only be required to:

1. Enable employees to make an automatic contribution from their paycheck into their Secure Choice Account.
2. Transmit the payroll contribution to a third party administrator to be determined by the Board.
3. Provide state developed informational materials about the program to their employees.

Would the Employee Retirement Income Security Act (ERISA) apply to employers mandated to participate in Secure Choice?

No. The federal Department of Labor (DOL) has released new rules for state administered retirement programs like Secure Choice that exempt all employers who are mandated to participate in a Secure Choice type program from ERISA.

When Would an Employer be Mandated to Participate?

Eligible employers with more than 100 employees will be mandated to participate within 12 months after the program is open for enrollment; Employers with more than 50 employees will be mandated to participate within 24 months after the program is open for enrollment; and within 36 months all other eligible employers will be required to participate.

Employer safeguards:

• Employers would not have any liability for an employee’s decision to participate in, or opt out of, the Program;
• Employers would not have any liability for the investment decisions of participating employees;
• Employers would not be a fiduciary of the Program;
• Employers would not bear responsibility for the administration, investment, or investment performance of the Program;
• Employers would not be liable with regard to Program design, investment returns, and benefits paid to participating employees;
• Employers would not be able to contribute to the employee account unless there was a change in federal law that permitted contributions without triggering ERISA requirements.

What This Means for Employees

When the Secure choice program is open for business, employees, who work for an employer that does not provide an employer-sponsored retirement plan, will be able to make an automatic payroll contribution into their personal Secure Choice IRA account . If an employee does not want to participate they can choose not to – this is called opting-out. The account will stay with the employee from job to job throughout their career. Upon retirement, the employee could take all their money out or convert it to a monthly income stream.

How much would an employee have to contribute?

The statute sets the contribution rate at 3%, but the Board would be able to adjust the contribution rate to no less than 2% and no more than 5% of each paycheck. Employee contributions could be automatically increased by 1% annually up to 8% but employees may choose a lower rate.

Can an employee change their mind about participating?

Yes, an employee can opt-out of the program at any time. Employees will be given an opportunity to re-enter the program during an open enrollment period at least once every two years.

What type of investment plan could an employee invest in?

For up to the first three years of the program, the Board would establish managed accounts invested in U.S. Treasuries, or similarly low-risk investments. During that time the Board will develop investment options that minimize fees and provide maximum possible income replacement balanced with appropriate risk. The Board may also develop investment options that address risk-sharing and smoothing of market losses and gains.

Will there be a cost to participate?

There will be a small fee that will be paid out of the employees’ payroll contribution.

Could an employee take money out in case of an emergency?

The statute allows for the Board to develop a policy for hardship withdrawals. The Board understands that in emergency situations people may want to access their retirement savings.

What happens if an employee changes jobs and their new employer doesn’t participate in Secure Choice?

The employee’s Secure Choice account would remain active throughout their career unless an employee chooses to stop participating. The statute requires the Board to develop a process for employees to continue to contribute to their account, but it would not require employers, who already offer a retirement plan, to enable an automatic payroll contribution.

How much will I be able to save for retirement?

How much you will be able to save depends on how long you will be working before you retire, how much you contribute during each pay period, and the type of investment plan that you choose. The most important factor is time. The more time you have to save, the more your money will be able to grow beyond what you contribute. This is called the magic of compound interest. Every time you contribute, you get interest on your contribution plus the interest you have already earned. For example, if you contribute $50 a month you will get interest on the first $50. After the second contribution, the interest you receive will be based on the $100 you contributed, plus the interest you earned on the first $50. Every time you contribute, the amount of interest you earn will get bigger because it is based on your total contributions plus the interest you have earned on that total. That’s how your money makes money.

Fast Facts on Retirement Insecurity

Are People Ready for Retirement?

• Each generation is projected to retire poorer than the last: 55% of young workers age 25-44 have projected retirement incomes below 200% of the federal poverty level (a commonly used threshold for economic hardship), compared to 39% of workers age 45-54 and 33% of workers age 55-64.
• To produce the income needed to maintain their standard of living in retirement, Americans need to save about 15% of earnings.
• More than half of today’s households will not have enough retirement income to maintain their pre-retirement standard of living.
• Among households age 55 and older, about 29 percent have no retirement savings.

Access to Workplace Retirement Savings Plans

• Access to workplace retirement plans makes individuals 15 times more likely to save for retirement among individuals with incomes between $30k and $50k.
• 7.5 million California workers (about 57%) of private-sector workers in California work for an employer that does not offer a retirement plan. Of those, over 2/3 (almost 5 million) are people of color, of which nearly 3/4 (over 3.5 million) are Latino.
• 77% of California workers (over 4.5 million) employed by businesses with fewer than 100 employees do not have access to a workplace retirement plan. In comparison, 41% of workers (over 2.9 million) employed by businesses with more than 100 employees have access to a workplace retirement plan.
• Only 22% of workers who earn less than $25,000 have access to a workplace retirement plan compared to 75% of workers who earn $100,000 or more.

People of Color and Retirement

• Almost half (47%) of workers in California likely to be eligible for Secure Choice are Latino.
• People of color will make up a majority (55%) of California’s senior population by 2035, compared to 41% today. The Latino  seniors population will grow from 21% in 2015 to 44% in 2035. The Asian senior population will grow from 15% to 17% of the state total. The share of white seniors will shrink from 59% to 45%. The share of Black seniors will drop, from 6% to 5%.
• Latino seniors, the fastest growing segment of the senior population, are almost three times as likely to be poor – with incomes below 200% federal poverty level (FPL) – as white seniors (44% vs. 23%). Asian and Black seniors are also significantly more likely to live in poverty than white seniors (32% and 37% vs. 23%).
• In California, 68% (3.5 million) of Latino workers, 50.5% (936,882) of Asian workers and 297,497 African American workers ages 18-64 work for private sector employers who do not offer a retirement plan.

Women and Retirement

• 58% (3.4 million) of female workers in California between the ages of 18-64 are not covered by workplace retirement savings plans.
• Women are 80% more likely than men to live in poverty in retirement. 32% of senior women in California have incomes below 200% federal poverty level, compared to 26% of senior men. The average female senior has half as much income as the average male senior ($15,500 vs. $31,000).

Young People and Retirement

• 58% of young workers age 25-44 have projected retirement incomes below 200% of the federal poverty level (a commonly used threshold for economic hardship).
• Almost 65% (3.5 million) of California workers between the ages of 18-34 are not covered by a workplace retirement plan.
• Younger workers tend to change jobs more frequently than older workers, as the median tenure of workers ages 25 to 34 is about three years, while median tenure of workers ages 55 to 64 is a little more than 10.4 years.

Social Security

• The average monthly Social Security retirement benefit is $1,328 as of January 2015.
• At least 22% of retirees rely on Social Security for 90% of their income.
• At least 62% of retirees rely on it for more than half of their income.

Publications Cited:

• Nari Rhee, “6.3 Million Private Sector Workers in California Lack Access to a Retirement Plan on the Job” (June 2012)
• Boston College Center for Retirement Research, “How much should people save?” (July 2014)
• Alicia H. Munnell, et. al., “NRRI update shows half still falling short” (December 2014)
• Employee Benefit Research Institute (EBRI), “2014 RCS Fact Sheet #6 Preparing For Retirement In America”
• David John and Gary Koenig, “Workplace retirement plans will help workers build economic security” (August 2015) AARP Public Policy Institute
• National Institute on Retirement Security, “Shortchanged in Retirement, The Continuing Challenge to Women’s Financial Future”, March 2016.
• Nina Ebner and Nari Rehee, “Aging California’s Retirement Crisis: State and Local Indicators”
• U.S. Bureau of Labor Statistics, “Employee Tenure In 2014” (2014)
• United States Government Accountability Office (GAO), “Most households approaching retirement have low savings” (May 2015); Retirement Security, (May 2016)
• The Pew Charitable Trusts, “A Look at Access to Employer-Based Retirement Plans in the Nation’s Metropolitan Areas”. (May 2016)