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Retirement's race divide

Research suggests a troubling trend: black workers investing less in retirement plans than white workers.

Employers have begun to discover troubling racial differences within their 401(k) retirement plans, a gap they say could leave today's black workers far less financially prepared for retirement than whites.

Investor surveys and research by two large employers strongly suggest that blacks participate in retirement plans at far lower rates and are much less likely than whites to invest in the stock market. An industrywide study of 401(k) plan activity by race has never been conducted.

Exelon Corp., the country's largest operator of nuclear power plants, discovered this year that about 15 out of every 100 black employees did not participate in its 401(k) plan, compared with around 10 of every 100 whites. It found that one in three black employees contributed less than 5 percent of their pay to the plan, compared to 14 percent of whites.

"We have to start addressing that," said Andrea Zopp, Exelon's senior vice president of human resources. "If African-Americans are not investing at the same rate, they will be behind."

McDonald's Corp. discovered in 2004 that half of its black store managers contributed to the company's 401(k) plan, a lower percentage than whites. The company says auto-enrolling store managers into the plan it has reversed the trend; today, 95 percent of black restaurant managers are plan participants.

Few employers today peer into their plans in search of racial or ethnic differences, as they are required to do for discrepancies between high- and low-income workers. Fidelity Investments and Vanguard Group, two of the country's largest retirement plan operators, publish encyclopedic volumes on America's investing habits that lack reference to race or ethnicity.

Experts attribute lower investment rates to poor instruction on financial topics in public schools, and misconceptions about the risk of stocks within parts of the black community. Employers have been urged to tailor their messages on retirement savings to account for what some black and Latino executives say are important cultural differences. And the federal government has been urged to strengthen its national strategy for financial literacy, which has been criticized as ineffective.

A survey by Charles Schwab Corp. and Ariel Mutual Funds concludes that four in 10 African-Americans with household incomes of $50,000 or more have no money in stocks, compared to one quarter of whites. Ariel's survey found blacks who enrolled in retirement plans save a median $173 a month while whites save $252. The survey was administered in June and July and has a margin of error of about 4.5 percent.

A separate survey of retirees found whites are nearly twice as likely to have $100,000 or more saved than blacks, even when education, peak income level and other factors are held constant.

"There are clear differences between blacks and whites: How we think about money, where we save and invest our money, what we do with our money and how we're influenced as to what we do with our money," said Mellody Hobson, president of Ariel Mutual Funds.

Since the 1980's 401(k) plans have replaced traditional pensions as the preferred retirement offering among employers. This shifted the responsibility - and the investment risk - to the employees, who are expected to contribute a portion of their paychecks before taxes. They can choose from a menu of investment options offered by their plan administrator, and some employers also match all or part of the employees' contributions.

The law allows plan providers to offer financial education to employees, but limits the kind of advice they can give. As a result, workers are largely expected to decide for themselves how much to save and which investments to choose.

Ariel's Hobson hopes the company's survey, which has been conducted for a decade, will prompt more research and discussions over the gaps.

"We have 10 years of this data - year after year the same story," said Hobson, who sits on the ICI's board. "It's not like this is some kind of fluke."

[Last modified October 12, 2007, 01:11:14]