Auto Enrollment Can Help DC Account Balance Disparity

July 17, 2014 ( – Research from the Vanguard Group finds there are differences in defined contribution (DC) retirement plan account balances across racial and ethnic groups.

The authors of “Diversity and Defined Contribution Plans: Differences in 401(k) Retirement Wealth” say black DC plan participants, with a median balance of $6,529, and Hispanic participants, with a median balance of $9,920, lag far behind white participants ($28,572). Asian participants lead all groups, with a median balance of $39,987.

More broadly, the distribution of DC plan account balances shows 78% of black participants and 70% of Hispanic participants have account balances of less than $25,000. This compares with 48% of white participants and 40% of Asian participants who have account balances less than $25,000. For account balances greater than $250,000, 5% of white participants and Asian participants are in this group, versus less than 1% for black participants or Hispanic participants.

The authors note participant compensation is a prime factor is these account balance differences, with 47% of differences attributable to this factor. Additionally, average monthly contributions from the employer and employee accounted for 10% of account balance differences.

The research finds black and Hispanic participants defer a much lower percentage of their current compensation to their employer’s plan than do their white and Asian counterparts. For example, among participants earning from $60,000 to $89,900, whites defer an average of 7.4% of compensation and Asians 9.7%, compared to deferral rates of 5.7% for blacks and 5.8% for Hispanics.

Research by Vanguard also shows black employees have a DC plan participation rate of 64% and Hispanic employees 70%, while 77% of white employees participate in plans offered to them and 95% of Asian employees do.

The research shows that under voluntary enrollment, participant deferral rates are higher for whites and Asians than for blacks and Hispanics. Under automatic enrollment, however, participation rates improve for all groups and average around 96%.

According to the paper, with automatic enrollment effectively eliminating differences in participation rates among racial and ethnic groups, account balance differences are also dramatically reduced. The authors of the paper believe it is important to set higher default deferral rates and implement an automatic escalation feature.

“We believe that all groups will benefit from a well-designed automatic enrollment strategy over time,” conclude the authors of the paper. “Without such features, account balances under automatic enrollment are likely to remain low for all groups.”

The Vanguard analysis is based on a sampling of six large defined contribution plans and includes nearly 213,000 eligible employees. These employees are considered to be active plan participants, having received, at minimum, some type of nonelective employer contributions. The types of industries covered include natural resources, financial services, health care, transportation and technology.

The paper is part of the Vanguard series, “Diversity and Defined Contribution Plans,” which examined the defined contribution plan experience of different racial and ethnic groups. Reports from the series have covered topics such as automatic enrollment plan features (see “Auto Enrollment Particularly Good for Blacks and Hispanics”), as well as loans and hardship withdrawals (see “Blacks and Hispanics More Likely to Borrow from 401(k)”).

A copy of the current paper can be found here.