Can Plan Design Changes Close the Racial and Gender Savings Gap?

A new report by a collaborative of industry stakeholders suggests that low-cost, plan-design solutions to nudge participants to avoid early withdrawals could make a significant dent in the racial and gender retirement savings gap.

The report also observes, however, that more study is needed to investigate which plan design changes might help the most and which solutions are most appropriate for different employee populations.

“Our findings, while troubling, could also be good news: interventions that could help workers avoid using their retirement savings for preretirement expenses could also help reduce the racial gap in retirement savings,” the report stated. It adds that, “The hard work will be studying different approaches to see which ones work and for whom.”

The report—Racial and Gender Disparities in 401(k) Account Balances: How Large are They and What is Causing Them?—comes via Morningstar Retirement, the Defined Contribution Institutional Investment Association, and the Aspen Institute Financial Security Program, as part of the Collaborative for Equitable Retirement Savings, which the group formed in 2023 in an effort to understand the decisions of savers and to make retirement savings more inclusive and efficient.

As part of the report, the researchers examined anonymized 2022 data from nine 401(k) plan sponsors across approximately 180,000 active plan participants and found that, even after controlling for salary and tenure, significant race and gender disparities remain in account balances. The report attributes those differences to variations in contribution, loan, and preretirement withdrawal behavior.

The report’s simulation results also indicate that eliminating preretirement withdrawals would substantially mitigate race and gender disparities, particularly for early- and mid-career 401(k) participants.

“It’s well known that there are racial and gender disparities in retirement account balances, but these disparities are not fully explained by different economic circumstances such as income or tenure,” explained Jack VanDerhei, director of retirement studies for the Morningstar Center for Retirement & Policy Studies and the report’s lead author.

VanDerhei notes this first paper by the collaborative is the start of a multi-phased effort to model the effects of these disparities and evaluate the effectiveness of different steps employers and policymakers could take. “Our initial findings suggest that reducing preretirement withdrawals can significantly narrow racial and gender disparities in 401(k) outcomes,” he added.

Additional findings include the following:

• Black and Hispanic females contribute lower percentages of their salaries than their counterparts after controlling for age, salary, tenure, and plan design variables.
• Black and Hispanic workers withdraw a larger portion of their account balances before retirement and take these preretirement withdrawals more frequently than their white counterparts. These differences grow more extreme the closer people get to retirement.
• Black participants have a higher probability of having an outstanding loan than their white counterparts. At ages 55-59, both Black men and women have a 49% probability of having a loan outstanding.

The Collaborative’s first publication is focused on its first two of five phases of analysis. The five phases are:

• identifying existing racial and gender disparities in account balances after controlling for salary and tenure;
• identifying the causes of such disparities by analyzing race/gender differences in participation, contribution, asset allocation, and loan and preretirement withdrawal behavior;
• incorporating a stochastic accumulation model to show how these disparities will evolve by retirement age;
• focusing on how plan design, benefit, and policy changes are likely to influence disparities; and
• incorporating the stochastic decumulation module from the Morningstar Model of U.S. Retirement Outcomes to allow for the analysis of various risk management techniques.

“Retirement savings are the second largest source of household wealth in the U.S., which means that our efforts to close larger racial and gender wealth gaps require a retirement savings system that works for everyone,” emphasized Karen Biddle Andres, director of impact strategy and partnerships at the Aspen Institute Financial Security Program. “This report signals that minor plan and benefit changes can likely translate to significant increases in the retirement savings balances of Black and Hispanic households in particular.”

A summary of the report can be found here.

The full report can be requested here.