Investing

The racial retirement savings gap remains wide – How these state IRA programs are working toward equity

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The income and wealth gaps between people of color and white households are wide, but state-run retirement programs are attempting to help workers find parity.

As many as 67% of private-industry workers had access to retirement plans in 2020, according to the U.S. Bureau of Labor Statistics. A significant number of employees, however, remain left out of these programs — and it tends to be workers of color who are missing out.

Indeed, about 64% of Hispanic workers, 53% of Black workers and 45% of Asian American workers have no access to a workplace retirement plan, according to AARP. Small employers are also less likely to offer retirement plans to their workers, with about 78% of those who work for companies with fewer than 10 employees lacking access to a plan, AARP found. 

State-facilitated individual retirement account savings programs have stepped in to attempt to close that racial savings gap.

Federal Reserve Board, 2019 Survey of Consumer Finances

“It’s preliminary at this point, but the idea was to close the retirement savings gap for people who are left out, and that tends to be lower-income workers, workers of color,” said Michael Frerichs, Illinois state treasurer.

Sixteen states have enacted new initiatives to help private-sector workers save and 11 of them have auto-IRA programs, according to Georgetown University’s Center for Retirement Initiatives. As of the end of January, there were more than $735 million in assets in these state-facilitated retirement savings programs, the center found.

“An important part of the purpose of the nationwide movement to have states play a supporting role for the private pension system has been this: to narrow the racial and gender and white-collar versus blue-collar savings gaps,” said J. Mark Iwry, nonresident senior fellow at The Brookings Institution.

He coauthored former President Barack Obama’s “auto-IRA” legislative proposal, a push to expand access to retirement savings through automatic enrollment in IRAs, and pioneered the nationwide state-facilitated retirement savings movement starting more than 20 years ago.

How it works

Rather than competing against large corporate retirement plans, state-facilitated retirement savings programs turn their focus to an underserved corner of the market: small businesses.

Most of these state programs require businesses to either offer a workplace retirement plan or help automatically enroll their workers into the state’s program.

Typically, the savings program is a Roth IRA — which means employees are saving money on an after-tax basis — and they can put away 4% to 6% of their compensation through an automatic payroll deduction, according to Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute. Employers themselves aren’t paying for the programs, and an investment firm is managing savers’ accounts.

The upshot of using a Roth IRA to save is that the funds grow free of taxes and can be withdrawn tax-free in retirement, subject to certain conditions. In the event participants need to pull money out for an emergency, they can take their own contributions — but not the earnings — tax-free.

Among the participants in Illinois’ Secure Choice program, about half are Black or Hispanic, according to Frerichs. The program has been running since 2018 and recently expanded access to firms with as few as five employees.

“We’re getting the people who fell through the cracks and don’t have a safety net,” he said, noting that this includes employees at bars, restaurants and grocery stores.

Perhaps the most powerful attribute of the auto-IRA plans is the automatic payroll deduction. “This is the ‘set it and forget it’ mentality,” said Fiona Ma, California state treasurer. It’s easy for employees to spend the money that lands in their checking accounts, so having a portion of it go directly toward retirement allows their funds to grow.

Workers joining CalSavers begin with a default contribution of 5% of their pay, and they’re subject to an annual automatic escalation of 1 percentage point until they are saving 8% of their salary, according to Katie Selenski, executive director of the program.

“Being able to save and have it accumulate has been a game changer in trying to decrease the wealth gap,” Ma added. She noted that two out of three workers eligible for the program in California are people of color.

On Jan. 1, the state expanded its CalSavers program to businesses that have one to four employees. If they don’t already offer a 401(k) plan to employees, those employers are required to have a payroll deposit savings arrangement that would allow workers to participate in CalSavers by the end of 2025.

Strengthening savings

The wealth disparity between households of color and white households is the result of generations of discrimination, including practices such as redlining — that is, the denial of loans to prospective homebuyers in minority neighborhoods. That means these state IRA programs mark a step toward closing the gap.

Legislators have pushed for more progress in the form of a measure in the Secure Act 2.0. A provision in the proposal would establish a federal matching contribution for lower-income workers saving in a qualified retirement account, starting in 2027. This match would be a maximum 50% of up to $2,000 in contributions — a maximum of $1,000 per person.

“For low-income workers, if they can put away $2,000 and get a 50-cent match for each dollar, that’s a significant boost to them,” said Monique Morrissey, economist at the Economic Policy Institute. “That will help, but it’s several years into the future. So right now, we see that these [auto-IRA] plans help in terms of convenience.”

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