The share of Hispanic families with savings in retirement accounts declined in the wake of the Great Recession, from 38% in 2007 to 35% in 2016, while the share of Black families with retirement savings declined from 47% to 41%, according to an Economic Policy Institute (EPI) analysis of 2016 Consumer Finance data. In contrast, two-thirds (68%) of white non-Hispanic families had retirement savings in 2016, a share that was not much affected by the Great Recession (it was 67% in 2007).
The EPI analysis also found high-income families are seven times more likely to have retirement account savings than low-income families.
More recent data from the Bureau of Labor Statistics (BLS)’s March 2021 “National Compensation Survey” shows the percentage of individuals with the lowest average hourly wage who have access to a defined contribution (DC) retirement plan is fewer than half that of individuals with the highest average hourly wage. However, access to a DC plan is only part of the story. Among individuals with the lowest average hourly wage, the DC plan participation rate, on average, is 22%, compared with 73% among individuals with the highest average hourly wage.
Private Industry Workers' Access and Participation to DC Retirement Plan Benefits by Average Hourly Wages
Willis Towers Watson has been looking into how plan sponsors can consider equity and inclusion in their retirement plan designs to help address some of these gaps, notes Kezia Charles, director of retirement at Willis Towers Watson in Alexandria, Virginia. “Our 2020 DC survey asked employers if they have reviewed their plan to consider DE&I [diversity, equity and inclusion] and the relation between participant behavior and plan design,” she says.
Charles says plan sponsors are also looking at how salary affects an employee’s ability to save. “They are considering nonelective contributions in addition to matching contributions, and we’ve seen at least one organization looking at establishing a floor on the match to ensure lower-income participants at least have minimum benefits,” she says.
According to Charles, employers are beginning to do more data analysis, breaking it down by gender, race, age and income. They then use that information to understand differences in participation rates, loans and withdrawal uses. She says some equity issues plan sponsors might find can be addressed by plan design.
David O’Meara, director of investments at Willis Towers Watson in New York City, previously told PLANSPONSOR that a plan sponsor wanting to make diversity and inclusion part of its DC plan’s purpose should think about who the investment lineup is developed for.
“In general, investment lineups benefit those who have the ability to save and those more comfortable with investment decisions,” he said. “So, plan sponsors should be thinking about those not able to save as easily to help them with that, and, for those less highly educated and less comfortable making investment decisions, plan sponsors should create ways to engage those participants and simplify the investment selection process. This could lead to better investor behaviors across the participant population.”
Addressing Employees’ Financial Health
When it comes to retirement savings, employers should let employees know that starting small is OK, says Celeste Revelli, director of financial planning at eMoney Advisor in the Philadelphia area. “Maybe they can start with a 1% deferral to the retirement plan and increase that amount as their income increases,” she adds.
She says every organization has different employee demographics with different financial needs. Initially, employers need to be aware of financial health differences across their employee populations. “If the retirement plan’s company match contribution is generous, but an employee can’t even contribute to the plan, it doesn’t matter how generous it is,” she says.
“Employers need to help employees with other financial issues,” Revelli continues. “Offering financial education, financial wellness workshops, budgeting and debt management tools, and access to financial professionals could help them find the money to save for retirement.”
Employers can also provide resources to help employees better allocate their take-home pay, she adds. For example, they can provide access to mobile applications that will assess employees’ spending or support tools to help employees look at what they are spending on benefits to figure out how to save money in different areas.
Charles also says improving equity in financial benefits should include a conversation about financial literacy, helping employees understand the impact of their decisions and their use of financial resources. For example, is taking a loan from the DC plan an employee’s only option?
She says Willis Towers Watson’s 2021 “U.S. Perks” study found certain groups of employees need more emergency funds assistance. To address that, some employers are offering emergency assistance funds, as well as financial planning services and debt services to help employees with mortgages and consumer debt.
While automatic enrollment is a great tool for getting people to save for retirement, employers could potentially use a similar process to help employees establish an emergency savings account within the plan, Revelli says. Or employers can provide their employees with the ability to contribute to emergency savings outside of the retirement plan. “But I come back to take-home pay and helping employees see where they can free up money to save for retirement or emergencies,” she says.
Revelli says it’s important to have a pulse on employees’ financial needs and where there are barriers to financial success. For example, she says, employers that offer a student loan repayment benefit might not be helping other groups of employees (i.e., those without student loans who are struggling with other financial needs). She suggests employers survey employees—and provide an incentive to complete the survey—to understand the challenges they have. If debt due to family care is an issue for a large number of employees, for example, the employer can address that.
“Employers can expand their menu of benefit options to show they are listening to all areas of financial concern and offering help for them,” Revelli says. “Employers can also take a look at what benefits they are already offering that are being used and which are not to repurpose their benefits lineup.”
In addition to using data to determine employees’ needs, plan sponsors should take the opportunity to use employee resource groups, focus groups or pulse surveys, Charles suggests. Employers should ask how employees are interacting with their retirement plan, what their financial needs are and how the benefits offered are meeting their needs.
She adds that technology gives plan sponsors the opportunity to make more financial resources available to employees through access to financial planners and planning tools. “Technology will allow employees to involve family members and help them make more educated decisions,” she says.
In addition to offering financial benefits to meet employees’ needs, employers must provide education or access to financial professionals to help employees use their benefits, Revelli says. “These things will help employees feel they can view employers as trusted sources, and normalizing talk about finances at work builds trust,” she adds.
Since there are so many wealth and pay gaps across various demographics, employers offering equitable pay is often the first step to providing equitable benefits, Revelli says. Conducting ongoing competitive market pay and pay equity analyses is a first step to help employees find more financial security.
She adds that offering financial wellness tools focusing on spending, saving and debt, as well as incentives to use the tools, is also important to promoting benefit equity. “Getting ‘today’s money’ in order can help employees get to a point where they can comfortably contribute to retirement,” Revelli says.
Taking Care Not to Discriminate
Employers will need to be careful not to step into a discrimination problem when trying to make benefits more equitable, warns David Klimaszewski, a partner at Culhane Meadows PLLC in Dallas. For example, giving women a larger retirement contribution after seeing data that women are less prepared for retirement than men can create a gender discrimination problem. “That type of knee-jerk response doesn’t work well,” he says.
Trying to single out a particular class of employees, such as secretaries in a law firm, might or might not be a problem, but, generally, discrimination is something employers need to take into consideration, Klimaszewski adds.
All benefits have some sort of discrimination rule—mostly so higher-paid employees don’t get a disproportionately large share of benefits, Klimaszewski notes. However, giving lower-paid employees a better benefit is generally not a violation of those rules, and he says he has seen some employers do that.
In some cases, lower-paid employees would prefer to get a bigger paycheck than a bigger benefit. PLANSPONSOR’s 2021 Participant Survey found 52% of respondents would rather receive a $5,000 bonus than a $5,000 contribution to their DC retirement plan account.
However, sometimes increasing pay will result in a bigger benefit, Klimaszewski notes. For example, if employees are contributing a percentage of pay to their retirement plans, increasing their pay will increase the amount that goes into the plans.
Klimaszewski says it is generally OK to move the value of one benefit to another—e.g., allowing employees to use the value of unused paid time off (PTO) for student loan repayments. However, in such cases, it might become a taxable benefit, he notes.
“Employers must investigate the differences in tax rules,” Klimaszewski says. “A benefit might become taxable if an employee receives money, and it depends on how the money is paid. For example, medical coverage provided by an employer is generally tax-free, but if the employer paid cash to the employee, and the employee bought her own medical insurance, that insurance is generally not tax-free.”
Klimaszewski suggests employers should understand the discrimination rules for each benefit before structuring the design to give better benefits to certain groups of employees.
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