Nine out of ten people who are employed — both blacks and whites — have access to a defined contribution plan such has a 401(k). Of those, 90% of each group contributes regularly. That’s great news, but consider the following, from the 11th annual Ariel/ Schwab Black Investors Survey, which polled 503 blacks and 506 whites with household incomes of at least $50,000:
- White Americans have more than twice as much saved for retirement as blacks.
- The median monthly amount that blacks contribute to their 401(k) plan is $169, while whites contribute about 50% more, or $249 each month. As a result, the median total household savings for retirement reported by black respondents is $53,000, in contrast to whites at $114,000.
- While overall stock ownership among blacks is still lagging, the historical preference for real estate among blacks is at a low point. This year, just 39% of blacks said real estate was the “best investment overall.” 37% picked stocks or mutual funds. Among whites, just 28% chose real estate, compared to 55% who chose stocks and mutual funds.
- About two-thirds of blacks (compared to about a half of whites) say they would increase contributions to their retirement plan if employers provided access to financial advisors, seminars about retirement investing, and/or education about the features of their plans.
I chatted with Mellody Hobson, president of Ariel Investments and Lisa M. Toppin, vice president of Charles Schwab, about this year’s new findings and what they tell us about employee/employer relations in terms of investment.
Fast Company: According to your survey results, why is it that black Americans put significantly less each month into their plans, resulting in smaller savings than white Americans, when they are given equal opportunities with employer-sponsored contribution plans?
Mellody Hobson: We’ve seen a number of reasons for black underinvestment. First, and foremost, exposure is a big deal. If you don’t grow up in a home where the stock market is discussed, that puts you behind the eight ball. Since there’s very little evidence of financial literacy in schools, that only deepens the problem. We have some cultural biases that lead us away from the stock market and lead us toward other things like real estate an insurance products. And so that’s why even with the same resources, the same opportunities, working at the same company and making the same amount of money, whites still might be investing and saving more than blacks.
Lisa Toppin: There are cultural factors that keep minorities from investing. For example, they are more likely to be caring for parents, or elderly who are living in their homes. That’s a drain on resources. There is also a high value for educating children — sending them to college in their community. Those things become the primary focus of saving and investing, versus saving for retirement. So when we look at the strata of goals around saving and investing for black Americans, it is much more split than it is for their white counterparts. You talked about equal opportunity; that’s the good news around the outcome of this survey. When we look at how people are actually investing in 401(k) plans, blacks are actually on par with their white counterparts. 90% of folks who have the opportunity to participate in a 401(k) plan are doing just that.
MH: The big issue is that even though blacks are participating, the amount we are putting away is significantly different; so we just won’t get the same benefit.
FC: To expand on that, what sort of advice do you have for employers to help their employees with contributions to their retirement plans?
MH: Employers should look at their 401(k) plans by race, and see what kind of differences might exist there. Many employers don’t even know there are major differences that exist by race.
LT: Employers can actually have an impact and make a difference. What we heard is this: With advice, people are much more likely to participate, increase their savings, and diversify their efforts. And so employers should take action: offer seminars, meetings, and advice without cost. We’ve learned that online vehicles don’t really reach this community in particular.
FC: Do you think employers would be prone to doing that if they knew that their employees would more likely increase contributions?
MH: For sure. I think that employers are highly motivated to get plan participation up and get those balances up, because they understand that to the extent they help their employees secure their retirement, they only build a stronger affiliation and loyalty with the company.
FC: Why are half of 45% of African-Americans under the age of 50 (who say they want to retire by age 60) not citing retirement as their number one priority when saving and investing?
LT: I think it goes back to some of the issues we talked about in terms of some of the different cultural nuances that exist in our community.
MH: Another thing we found in our data is that blacks rely on a bigger portion of our retirement income to come from social security, and as a result some of the concerns we may have around being prepared for retirement are dampened. Many of us also are more likely to work for an organization that has a traditional pension fund, because we tend to, in higher numbers, work for the government more than corporate America. Many blacks know they are making some trade-offs in that regard; for example when working for the government they may take lower pay in order to get that secure retirement. But as the world shifts from traditional pension funds to defined contribution plans, as well as the fact that social security is on shakier and shakier ground with each year that passes, this only heightens the need for the discussion we’re having here.
FC: Who is the key audience for this survey?
MH: This survey is created for the general public and the general media. It is really to light a fire under minority investors to get them to move closer to what our white counterparts are doing, so that we can be on par with them when it comes to our amount of saving and investing.
FC: Was the survey created because of Mellody and John W. Rodgers [founder and chief investment officer of Ariel Investments] bringing up those issues?
LT: It was Ariel that had the hypothesis around the fact that there might be differences and then partnered with Schwab…
MH: …and speaking and being a pioneer in the business as the first minority owned money management firm and mutual fund company, we started to see in anecdotal evidence that minorities were not investing to the same degree as our white counterparts, and that led us to ask a lot of questions of major financial institutions and colleagues in the industry. We determined that there was no data on this issue anywhere and decided that we were going to try to create a national dialogue around this issue, not make it a black issue, or a white issue, but everyone’s issue, to the extent that whole groups of our society aren’t saving and investing enough, and ultimately have a potential to be a burden on our society.
FC: What do you think are the most important points from the survey that investors can learn from?
MH: I don’t want black Americans to say because the market is down a lot we’ve been right not to be in the stock market to the same degree as whites. Because all the data shows that over a long term the stock market has been the best overall investment. On top of that, one of the ways that people often try to invest is through market timing — being in and out of the market at the perfect time — which all academic data shows unequivocally does not work. The University of Michigan did a great study over 41 years of market return; if you had been in the market the entire time, the average return rate was 10.84%. But if you omit the 90 best days in that 41-year-period, your return is just over 3%. And so specifically, 1% of the trading days captured 96% of the return. We want African-Americans to clearly know that even though we are in a very volatile time right now, and the market has had a significant downturn, that does not mean you’re justified to sit on the sidelines. And ultimately, the greatest investors of all time take a long-term patient view. That is the way to achieve long-term financial success.