Financial Literacy Research Consortium Conference

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Financial Literacy Research Consortium Conference
November 18, 2010
Presented by:
Amar Parikh, Director of Corporate Affairs, Ariel Investments, LLC
Alison Borland, Retirement Strategy Leader, Aon Hewitt
About the Ariel/Hewitt Study
› Ariel has been studying the racial wealth gap since 1998 through our Black Investor Survey.
› In 2008 Ariel and Hewitt decided to study 401(k) savings and investing behavior by race at major corporations. › We received a grant from the Rockefeller Foundation and we asked several think f
f
tanks to join us. › This resulted in the most comprehensive study of 401(k) data by race ever p
y
( )
y
conducted. – We examined the 401(k) savings patterns of over 3 million participants in 57 of g
p
q
y
( )
the largest companies to quantify 401(k) underinvestment in African American and Hispanic communities.
1
Data Collection
› Ariel/Hewitt reached out to the largest companies in the U.S. › 57 companies agreed to participate in the study. Average company size was 57 companies agreed to participate in the study. Average company size was
51,000 employees.
› Each participating company provided 401(k) plan provision information and participant level data.
d
i i
l
ld
› Data were collected as of 12/31/2007 Demographics of Employees
6.1% 2.9%
White
10 6%
10.6%
Black
Hispanic
Asian
15.3%
Mi d
Mixed and Other
d Oth
65.1%
2
Industries Represented
Companies
Belong to
Fortune 500
Employees
% of Total
Banking/Finance
8
7
579,291
20.56%
Chemicals
2
2
29,930
1.06%
Consumer/Misc. Product Mfg
2
2
54,418
1.93%
Diversified Mfg.
6
6
185,110
6.57%
Electronics
1
1
3,982
0.14%
Entertainment/Publishing/Printing
1
1
34,154
1.21%
Food & Beverage 4
4
187,239
6.65%
Healthcare
3
3
218,508
7.76%
Insurance
5
4
106,817
3.79%
Pharmaceutical
3
3
79,827
2.83%
Professional Services
3
2
33,037
1.17%
Retail
8
8
634,153
22.51%
Telecommunications
3
3
542,335
19.25%
Transportation Svcs.
2
2
71,947
2.55%
Utilities/Energy
6
6
56,781
2.02%
57
54
2,817,529
100.00%
Industry
Total
3
Participant Level Data
› Gender
› Date of Birth
› EEO Code
› Original Date of Hire
› Date of Initial Enrollment
› Base Salary
› Total defined contribution plan balance (including loan balances)
Total defined contribution plan balance (including loan balances)
› 2007 401(k) employee deferral › Sum of pretax, after tax and Roth 401(k) savings rate
› Percent of total balance in equities
› Indicator for loan outstanding
› Indicator for taking a hardship withdrawal in 2007
I di t f t ki
h d hi
ithd
l i 2007
› Home Address Zip Code
4
DC Plan Usage Definitions
Participation
Measure of employees, active and eligible for a company saving plan, who made any contribution (before‐tax, after‐tax or Roth) in 2007
Contribution rate
Average of the sum of before‐tax, after‐tax and Roth contribution rate as of 12/31/07
Percent in equities
Percent of total balance in equities as of 12/31/07 –Equities include large U.S. equity, mid U.S. equity, small U.S. q y
q y
g g
q y p
y
equity, international equity, emerging markets equity, specialty sector, and company stock. –Balanced / premixed portfolios are assumed to have 60% in equity. –Self‐directed brokerage is assumed to have 50% in equity.
Loans
Measure of active participants with a loan outstanding on 12/31/2007.
Withdrawals
Active participants who took a hardship withdrawal during 2007.
5
Limitations
› Data request spanned various service providers, therefore limited information was available due to inconsistencies across providers.
› Some data elements were not available and/or recorded by employer/recordkeeper (e.g., education level).
l
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dk
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› Equity assumption was simplified.
E uity a u tio
a i lified
› We know the behavior difference exists by race/ethnicity, but our data does We know the behavior difference exists by race/ethnicity but our data does
not include perceptions or explanatory detail by participant.
› Lack of data and depth beyond defined contribution plan.
6
To Win the Race You Have to Compete
› African Americans and Hispanics:
– Trailed in participation, contributions, and equity exposure – More likely to take loans and early withdrawals
› African Americans had lower account balances at every income level
African‐
American
Hispanic
Asian
White
All
Participation
66%
65%
76%
77%
74%
Average Contribution Among Participants
6.0%
6.3%
9.4%
7.9%
7.6%
Average g
Percentage in Equities
66%
70%
73%
72%
71%
7
The Savings Killers
African‐
American
Hispanic
Asian
White
All
Percentage with Loans Outstanding
39%
29%
16%
21%
24%
Percentage Taking a Withd
Withdrawal
l
7.8%
3.4%
2.0%
2.1%
3.0%
8
Recipe for Disaster
African‐
American
Hispanic
Asian
White
Average 401(k) Account Balance—All $21,723 $22,547 $45,856 $57,615 Average 401(k) Account Balance—Employees E i $30 000 $59 999
Earning $30,000‐$59,999
$21,224
$22,017
$32,590
$35,551
Average 401(k) Account Balance—Employees Earning $120,000 or more
$154 902
$154,902
$150 456
$150,456
$161 259
$161,259
$223 408
$223,408
9
OPM Study
› On May 26, 2010, Senator Herb Kohl (D‐WI) released a study by the Office of Personnel Management (OPM) examining Federal Thrift Savings Plan (TSP) participation rates by ethnicity and gender. – The Thrift Savings Plan is the federal government equivalent to a 401(k) or 403(b) retirement plan.
– Sample size was approximately 1.5 million
– All minorities were placed in one group
– Did not examine differences in loans and withdrawals. 10
OPM Study Results‐Race
› Participation rate among minorities was higher in the TSP.
› OPM study mirrored results of the Ariel/Hewitt study, showing that the same OPM study mirrored results of the Ariel/Hewitt study, showing that the same
racial retirement wealth gap exists in the public sector. Non‐Minority
y
Minority
y
Participation
87.8%
82.5%
Average Deferral Rate A
D f
lR
(Contribution Rate)
9.8%
8.1%
22.0%
31.1%
$81,152
$54,430
G Fund Only
G Fund Only (Short Term Treasuries Only)
Average TSP Balance
11
OPM Study Results‐Race
› Differences in participation, contribution rates, and TSP balance were consistent across nearly all income levels.
Salary Less Than $50,000
Non‐Minority
Minority
Participation
80.5%
74.6%
Average Deferral Rate
7.8%
6.4%
Average TSP Balance
$26,308
$19,689
Non‐Minority
Minority
Participation
92.8%
92.4%
Average Deferral Rate
11.0%
10.2%
Average TSP Balance
Average TSP Balance
$162 724
$162,724
$142 508
$142,508
Salary Between $100,000‐$150,000
12
OPM Results‐Gender
› The OPM study also examined gender differences. Male
Female
Participation
85.8%
86.4%
Average Deferral Rate (C
(Contribution Rate)
b
)
9.7%
%
8.8%
%
24 1%
24.1%
26 2%
26.2%
$79,819
$62,527
G Fund Only (Short Term Treasuries Only)
Average TSP Balance
Average TSP Balance
13
Ariel/Hewitt Study Results‐Gender
› Gender differences were not as significant as racial differences.
› Differences between females of the various racial groups were consistent with Differences between females of the various racial groups were consistent with
differences found in the total population.
› Black and Hispanic women participated at a higher rate than Black and Hispanic males, but contributed a slightly lower percentage. › Males across all racial groups had more invested in equities than females. › Except for Hispanics, males across all racial groups were slightly less likely to E
f H
l
ll
l
l hl l
lk l
have a loan outstanding. › Black females were far more likely to have taken a withdrawal than Black males y
(8.6% versus 6.2%). For all other groups withdrawals were approximately the same for men and women. 14
Ariel/Hewitt Study Results‐Gender
Male
Female
Participation
74%
73%
g
Average Contribution Rate
5.5%
4.9%
Average Percentage in Equities 74%
69%
Percentage with Loans Percentage
with Loans
Outstanding
23%
25%
Percentage Taking a Withdrawal
2 6%
2.6%
3 5%
3.5%
$58,803
$36,662
Average 401(k) Account Balance
15
Ariel/Hewitt Study Recommendations
The recommendations stated in the study were as follows:
› Encourage employers and the government to collect and report their retirement Encourage employers and the government to collect and report their retirement
plan data by race and ethnicity
› Incorporate financial literacy in education curriculum
› Modify 401(k) loan requirements to decrease the likelihood of default
› Provide necessary communication, education, and resources to help individuals make wise choices
k
i
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› Design 401(k) plans that benefit a broad, diverse employee base
16
Next Steps for Future Studies
› We suspect the Great Recession has severely impacted 401(k) savings especially for minorities
for minorities.
› Ariel will continue to conduct the Black Investor Survey on a bi‐annual basis. › OPM has committed to reviewing TSP characteristics on a regular basis going g
g
g g
forward.
› Ariel & Aon Hewitt are currently exploring ways to conduct a study in 2011 using 2010 data. 2010
d t
– Study scope may be expanded to include more behavioral analysis (e.g., impact of automatic enrollment, loan defaults, and why do these differences in patterns exist) tt
i t)
– Case studies at companies who have instituted positive changes to participant behavior
– Employee and employer surveys to gauge sentiment
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Study Contacts
Ariel Investments, LLC
Aon Hewitt
Amar Parikh
Amar Parikh
Alison Borland
Alison Borland
Director, Corporate Affairs
Retirement Strategy Leader
[email protected]
[email protected]
(312) 612‐2672
(615) 613‐4052
Washington Representation
Robert Raben and Kimberly Goulart
The Raben Group
The Raben Group
[email protected] and [email protected]
(202) 466‐8585
18
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