With Latinos being the fastest-growing segment of the United States workforce, it would seem that capturing the Latino 401(k) market would be big business for plan providers. Yet the Latino population has remained elusive, choosing not to take part as often as Whites or Asians when employer-sponsored retirement plans are offered, and dipping into their 401(k) for loans, significantly reducing their retirement savings.

A research report released last week by the National Council of La Raza (NCLR), the largest national Hispanic civil rights and advocacy organization in the United States, reveals that even when companies offer 401(k) plans Latinos are less likely to participate than Whites or Asians. The report, Insecure Retirements: Latino Participation in 401(k) Plans, points out that although Latinos currently make up 14% of the U.S. workforce and are projected to be one-third of the workforce by 2050, the current employer-sponsored retirement plans are not effective in helping Latinos to save for retirement.
 
“Latinos are a key part of our workforce but most have had little opportunity to save for the future,” explained Eric Rodriguez, NCLR Vice President, Office of Research, Advocacy and Legislation. “We expect high unemployment to make things even worse. Until more companies offer retirement plans and automatically enroll their employees, retirement saving will take a back seat as workers focus on putting food on the table today rather than saving for tomorrow.”
 
Yet David Wray, president of the Profit Sharing/401k Council of America, a Chicago-based association of providers of 401(k)s and other profit-sharing plans, explained that auto-enrollment only works when the participant views the plan as aligned with their own goals. Just having a default, auto-enrollment retirement savings plan is not sufficient. If it’s not coupled with “an aggressive education effort where the company goes and explains to participants in advance how important it is to save and why it is in their best interest,” Wray said.
 
When participants don’t understand why they should enroll, or in some cases, don’t even know they are enrolled in retirement savings plans, the result can be ineffective and costly. Wray used the example of McDonald’s. It was the first company to use auto enrollment in the 1980s but then it decided to terminate the program in 2000. The large number of small, unclaimed balances in the McDonald’s plan program made it economically unviable. Now McDonald’s has a combination-plan arrangement, where they auto-enroll everyone except the crew and provide a generous match, which motivates the other employees to enroll.
 
One technique to get higher participation and savings rates is for companies to communicate with employees in their own language, Wray explained. Another effective way to enroll more Latino and low-income participants is one-on-one counseling. But, the problem is this: For a lot of companies it’s not practical to meet face-to-face with potential participants because of the cost and the time, especially for companies with multiple locations.

“If anyone is poised to capitalize on the Latino 401(k) marketplace it’s the insurance companies,” explained Mike Alfred, CEO of BrightScope, an independent provider of 401k ratings and financial intelligence to plan sponsors, advisors, and participants. “Insurance companies already provide more services and charge more, which is part of their value proposition. And, they offer language support, which is one of the key things you need to break into the Latino market.”

Insurance companies, such as John Hancock, The Principal Financial Group, and MassMutual Financial Group, are the best positioned because they already have people on the ground in all these markets and can go out and meet with potential 401(k) participants face-to-face. An insurance company’s business model allows them to do this because the hope is that it can also sell life insurance, financial planning services, and 520 college savings plans. The 401(k) is just the beginning.
 
Leticia Miranda, NCLR’s Associate Director of the Economic and Employment Policy Project and author of the report, advocates retirement plans provided by insurance companies that pay out as annuities from retirement age onward as opposed to lump sum payments that are harder for people to manage when they are in charge. One such annuity, Miranda said, is offered by Putnam Investments. Employees’ place 5% of their income towards this new program and are guaranteed 26% of their final salary to be paid in fixed annuities from the time they retire until they die.
 
Alfred sees the low participation among Latinos and other low-income employees in retirement savings as part of a larger problem: the lack of a long-term retirement strategy at the government level.
 
“Because the government has no long-term strategy we have had a huge shift in responsibility for retirement from the government to companies to the employees themselves,” Alfred said.
  
President Barack Obama presented a proposal to Congress earlier this year for an Automatic IRA, or individual retirement account, which would automatically deduct a percentage of an employee’s salary straight from their paycheck to save for retirement. This plan would be for employees who don’t have other types of pensions or retirement savings plans, about 80 million workers in all. With the Auto IRA, employees would still have the opportunity to opt out of the program, but most don’t. The National Council of La Raza’s report shows that when employees are automatically enrolled, their savings rates jump to 80% from 20%.