Why are Black workers less likely to have retirement savings?

Each week of February, HR Dive will publish a story in its Black History Month series. This week’s installment unpacks the challenges Black workers face preparing for retirement.

While DEI efforts are working to address racism and inequality, Black workers continue to be less prepared for retirement than their White counterparts.

In A Compendium of Demographic Influences on Retirement Security, which was published by the Transamerica Center for Retirement Studies (TCRS), researchers make clear how big that gap remains.

“Demographic influences can profoundly affect an individual’s and family’s ability to prepare for financial security in retirement,” Catherine Collinson, CEO and president of Transamerica Institute and TCRS, said in a statement.

Here’s what HR managers need to know about Black worker’s financial challenges, and what they can do about them.

The equity gap in retirement

According to the Compendium, Black workers who have not yet retired have an estimated median of $17,000 saved compared to $74,000 for Asian American and Pacific Islander (AAPI) workers, $60,000 for White workers, and $29,000 for Hispanic workers.

Transamerica also found that 37% of Black people are more likely to rely on or expect to rely on Social Security as their primary source of retirement income compared to 34% for White people, 28% for Hispanic people and 19% for AAPI people.

According to a July 2023 U.S. Government Accountability Report, Black workers aged 51 to 64 were less likely to have a retirement account at all; when they do have one, the median balance is lower than those of White adults of the same age, across all income levels.

The financial pressures on Black workers, especially low-income Black workers, can put retirement in the background, said Craig Copeland, director of wealth benefits research at the Employee Benefits Research Institute. “They have different expectations and different experiences with the financial industry,” he said.

Wealth inequality also affects how someone can save. According to the Pew Research Center, the typical White household in 2021 had as much as 9.2 times as much wealth as a Black household.

Compared to their White counterparts, about three times as many Black, college-educated households financially support their parents, the Federal Reserve Bank of St. Louis reported. This means that the parents of Black college grads are likely unable to assist with things like paying for college or buying a home — all of which impacts Black workers’ ability to save.

The racial wage gap has been persistent as well, with Black full-time workers making about 20% less than their White counterparts, according to the U.S. Bureau of Labor Statistics. Lower incomes also reduce future Social Security payments since those payments are based on a worker’s lifetime of earnings.

“A person’s ability to financially prepare for retirement is greatly impacted by their household income. Lower income earners have fewer funds available to save and, moreover, they have less access to employer-sponsored benefits that can help them save, invest and protect their savings,” Collinson said.

What HR can do

While no one HR department can solve systemic racism and inequality, there are steps HR leaders can take to help workers set themselves up for a better retirement.

Automatic enrollment into retirement plans can help, said Copeland, “to make the workers make the decision to opt out.” 

Education about saving for retirement shouldn’t stop just at the “point of contributing,” he added, as lower-income workers also may feel pressure to cash out their retirement savings before retirement age due to financial constraints. Black workers are nearly twice as likely to make an early withdrawal compared to White peers, according to research from the MIT Sloan School of Management.

HR managers should “give more thought in helping people preserve their assets,” Copeland said, including providing information on how workers can roll over their assets —in ways that won’t trigger an early withdrawal penalty and tax bill.

If there are account minimums that can force an individual out of a plan or if that worker switches jobs, HR guidance can help them better understand that process and “better preserve that money, instead of taking the lump sum,” Copeland added.

HR can also make workers aware of the Saver’s Credit, which is an IRS credit to promote retirement savings in low- to moderate-income individuals using a 401(k) or similar plan, or an IRA plan. Education on these resources are especially key, as Transamerica found that fewer than four in 10 Americans who potentially meet the requirements know about these plans. 

Addressing these inequalities and all the reasons behind them is crucial for the future. “The U.S. population is becoming incredibly diverse, especially among younger generations,” Collinson said. “This trend is reflected in survey findings across race and ethnicity. The findings identify commonalities, expose disparities, and raise questions for further research.”