Narrowing the Wealth Gap through Better Access to Savings Programs
It’s no secret that many Americans are unprepared for retirement, let alone an unexpected repair or medical bill. But as bad as the nation’s retirement savings crisis is overall, the situation is worse for non-white households.
For instance, according to a 2020 report from the Center for Retirement Research at Boston College (CRRBC) when Social Security retirement benefits are included, the average Black household has 46% of the retirement wealth of the average white household. The average Hispanic household has 49%. And without Social Security, the average Black household has 14% and the average Hispanic household has just 20% of the retirement wealth of white households.
Studies on wealth inequality and racial wealth gaps point to several factors for this, including the rate of inheritance, home ownership — a major source of wealth building — and wage differences. But many of the under-saved also lack access to employer-sponsored retirement accounts.
Access can help narrow wealth disparity
It’s estimated that about half of all private-sector workers lack access to employer retirement plans. The situation is worse for those who own or are employed by small businesses where an estimated 74% lack access to a workplace retirement plan. Improving retirement plan availability for these individuals could help narrow the wealth gap and improve overall retirement security. An effective way to do this is by making affordable alternatives to workplace 401(k) plans available to employers of all sizes.
While setting up and managing a 401(k) plan may be too complex, time-consuming and costly for small businesses, choices that any size employer can afford are available. SIMPLE IRAs and Payroll Deducted IRAs, for example, are easy to set up, cover both owners and employees regardless of income level, and are subject to less regulatory and compliance burden than a 401(k) . They do, however, provide employees with the means to automatically contribute each pay period to a tax-advantaged and portable retirement savings account.
Regular participation is key
Many larger employer-sponsored workplace retirement plans have adopted automatic features, such as automatic enrollment and automatic default contribution increases, finding that these features help:
- Boost plan participation
- Increase participant savings rates
- Preserve participants’ retirement savings
- Improve retirement readiness, overall
Measures of retirement readiness, like the National Retirement Risk Index (NRRI), suggest automatic features are helping to improve retirement outcomes. While smaller employers may not be able to make available all the features a large employer can, offering a way to use payroll deductions to help employees save can still generate similar benefits.
Non-retirement savings programs can also help protect retirement savings
Similarly, other automated payroll-deducted savings programs can be added to a benefits package to promote savings outside of retirement accounts by all employees — protecting retirement plan balances from early withdrawals and depletion through loan interest, tax consequences, and a penalty.
These programs include tax-advantaged health savings accounts (HSAs) and flexible spending accounts (FSAs), emergency savings funds, and a variety of well-being reimbursement options. Each enables employers of all sizes to help their workers improve their wealth-building opportunities by making it easier to plan and save through automatic payroll deductions for future expenses.
Making more of these options available would be a welcome contribution to narrowing the wealth gap.
The material in this article is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal, or tax advice.