Automatic enrollment greatly increases participation in 401(k) plans for all racial and ethnic groups, with particular success for blacks and Hispanics, even among low earners, Vanguard research shows.
Most notably, automatic enrollment boosts participation rates by 60% for blacks, to 94%, and by 40% for Hispanics, to 95%. Even among Blacks and Hispanics earning less than $30,000 a year, participation under automatic enrollment jumps to 93% and 94%, respectively.
“This study confirms that the use of automatic plan design does reduce racial and ethnic disparities in saving and investing behavior through defined contribution retirement plans,” said Cyndy Pagliaro, a researcher at Vanguard and lead author of the report, “In Diversity and Defined Contribution Plans: The Role of Automatic Plan Features.”
“Plan sponsors concerned about these disparities should consider automatic plan design—but it must be carefully planned to ensure adequate long-term retirement savings for all groups,” Pagliaro said.
One way to do this, Vanguard suggests, is through automatic escalation of deferral rates, so that various ethnic groups eventually reach comparable savings rates. Also, while whites and Asians tend to be more aggressive investors, frequently gravitating to equity funds, Vanguard recommends leveling the playing field through balanced target-date funds.
The study further found that whites and Asians are more likely to override the default contribution rate and save more. As a result, their contribution rates average 0.5 to 2 percentage points higher than for blacks and Hispanics.
The study is based on an analysis of 250,000 participations in seven large 401(k) plans that Vanguard oversees as recordkeeper.
-- This article first appeared on Money Management Executive.