Cultural Differences Holding Back Black Savers

The 10 ^th annual Black Investor Survey by Ariel Mutual Funds and The Charles Schwab Corporation found that in a group of 500 Blacks and 508 Whites all earning more than $50,000 annually, the median amount of money saved by Blacks surveyed is less than half of their White counterparts ($48,000 versus $100,000). On a monthly basis, median savings is $182 for Blacks versus $261 for Whites, according to the survey, released today at the first-ever Ariel-Schwab Black Investor Summit in New York City.

Ariel Founder, Chairman and Chief Executive Officer, John W. Rogers, Jr., said he thought the difference in approach was cultural. “You learn about investing money when you have money to invest,” he told the audience.

Real Deal?

One of the single most consistent findings in the survey, according to its authors, is that more Blacks than Whites view real estate as a better investment than the stock market. In 2007, only a third of Blacks consider stocks and mutual funds to be the best investment overall, while nearly half said real estate was. For Whites, those proportions were reversed.

“Many Blacks think real estate is less risky, because it can be used to earn rental income and assume it will never go down in value,” the survey said. In fact, nearly half of all working Blacks believe they will rely on rental income during retirement, according to the report. However, in a companion study of retirees, fewer than two in ten actually rely on rental income for their retirement.

The survey, which admittedly concentrates on the perspective of higher income individuals, was first conducted by the two companies in 1998, when 57% of Blacks and 81% of Whites indicated that they owned individual stocks or stock mutual funds. During the past ten years, the number of Blacks who own stocks or mutual funds rose as high as 74% (in 2002) only to fall back to 57% again this year, while White participation has consistently hovered within a few percentage points of 80% (though it had dipped to 76% in the most recent data).

“The data is troubling because it suggests that barriers to investing are just as formidable as they were a decade ago. Our industry and our community must address this challenge aggressively,” said Ariel President Mellody Hobson, adding, “Government and employers also play a crucial role.”

Even when all other significant demographic factors were held constant - things such as age, income, gender, and education - Whites were nearly twice as likely as African-Americans to be investors. And, while more than half (56%) of Whites say that retirement is their most important goal for saving and investing, only 40% of African-Americans see retirement as their priority. All other things being equal, the study found that African-Americans were 50% less likely to see retirement as their primary saving/investing goal.

Retiree Perspectives

This year, Ariel and Schwab also conducted a first-of-its-kind survey of middle and upper income Black and White retirees to assess their investing behavior and how well they prepared for retirement. Overall, both African-American and White early retirees were happy about their retirement, with just 18% of the former and 11% of the latter rating their happiness as a "5" or below on a scale of 1-10.

However, the survey shows that retired Blacks have median savings of just $73,000 compared to $210,000 for Whites. Blacks, on average, also retired earlier than Whites (59 vs. 61) and are more likely to be relying on a pension or Social Security rather than a defined contribution plan, such as a 401(k) plan (although 55% of Black investors cited their employer's 401(k) plan as their impetus to begin investing). However, half of the African-American retirees surveyed were primarily employed by the government, compared with just one-third of the Whites. Consequently, 59% of African-Americans retired before the age of 60, compared with just 47% of Whites.

"The truth is that many Americans are not saving enough to ensure a comfortable retirement," said Schwab Founder, Chief Executive Officer and Chairman Charles R. Schwab. "The problem is broad-based; but the 10th anniversary of this research and today's summit serve as important reminders that the need to better prepare for their financial futures is even more pressing among this underserved segment of our population."

According to the Ariel-Schwab retiree survey, fewer Blacks than Whites have gone through some of the basic steps of retirement planning, such as calculating the amount of money they need to live comfortably in retirement. However, those who consulted with financial professionals were much more likely to have saved more than $100,000 by the time they retired, and were much less likely to have retired early.

Ethnicity Survey

Data presented by Great-West Retirement Services at the Summit outlined a three-pronged problem; lower incomes (black men made 20% less than their white counterparts), smaller contributions (black men contributed 58% less than their white counterparts), and more conservative investments (1.7 funds versus 3.6 funds out of 21 options available). That led to account balances that were 75% smaller in the random sampling of some 20,350 participants from Great-West Retirement Services' proprietary defined contribution recordkeeping system, despite the fact that black men worked, on average, 33% longer, according to Charles Nelson, Senior Vice President, Great-West Retirement Services. African-American females earn 8% less, contribute 31% less, and have account balances that are 66% smaller, on average, despite 27% more years of services.

The survey, which wa s noted that the average deferral rate by Asians in the survey was 5.9%, compared with 4.7% for Whites, 4.0% for Hispanic participants, and just 3.0% for African-American. African-American females in the sampling deferred 3.3%, on average, nearly twice the 1.9% rate of African-American males, but significantly less than the 4.8% deferred by White females and 4.5% by White males.

Another interesting divergence emerged in the types of distributions taken. While nearly a third of Whites (31%) rolled their distribution into an IRA, only 4% of African-Americans did. On the other hand, while 7% of African-Americans rolled over their distribution to another qualified plan, just 4% of Whites did. More than half (61%) of African-Americans took their distribution as a lump sum distribution, compared to "just" 50% of Whites. The survey also noted that Hispanic participants were much more likely to have a loan against their DC accounts (24.2%) than were African-Americans (15.3%), Whites (11.5%), or Asians (9.6%).

The study, Defined Contribution Trends by Ethnicity, included participants from both 401(k) and 403(b) plans, and was prepared by KK and Company.

For the conference, Ariel and Schwab published "The Ariel-Schwab Black Paper: A Decade of Research on African-American Wealth Building and Retirement Planning." The report is available online HERE