Continued economic uncertainty has led all workers to dip into their retirement savings, but minorities have been the hardest hit, according to a new study from Ariel Education Initiative (a nonprofit affiliate of Ariel Investments) and Aon Hewitt. Compared to their Asian and white counterparts, African-American and Hispanic employees are eroding their retirement savings at an alarming rate.

The prolonged economic crisis and resulting financial challenges led many employees to tap into their retirement savings to alleviate short-term financial stress. More than two-thirds of workers who took a withdrawal in 2010 reported they needed the money for an unexpected emergency, debt or day-to-day living expenses. That said, African-American employees took hardship withdrawals more than any other ethnic group. Fully 8.8% of African-Americans took hardship withdrawals in 2010, compared to 3.2% of Hispanics, 1.7% of whites and just 1.2% of Asian workers.

While most workers consider the ability to take a loan from their DC plan a desirable feature, doing so also significantly impacts their ability to adequately save for retirement. While not surprising that more people take loans during tough economic times, the disparity between racial and ethnic groups is alarming. Half of all African-Americans and 40% of Hispanic employees carried a loan balance at the end of 2010, compared to just 22% of Asians and 26% of whites.

The vast majority of workers who leave their employers with a loan outstanding—80% of African Americans, 76% of Hispanics, 71% of whites and 67% of Asians — subsequently default on them. Because loans account for an average of 20% of a worker's balance, those who default suffer a significant financial set back.

Aside from loans and withdrawals, cashing out is one of the most significant issues putting retirement savings at risk — particularly for African American and Hispanic employees. Two-thirds (63%) of African-Americans and 57% of Hispanics who left their employer in 2010 cashed out their balances. In comparison, 39% of white employees, and just over a third (34%) of Asian workers did the same.

"Most employees who cash out their savings will never be able to rebuild their balance," says Mellody Hobson, president of Ariel Investments. "Minority workers disproportionately affected by layoffs feel like they have no choice other than drain their retirement savings in order to make ends meet while unemployed."

The role of automation

One of the primary, and most basic, pitfalls of saving for retirement is getting workers to participate in a savings plan, and the study found a racial gap in DC plan participation. Just two-thirds of Hispanics and 68% of African Americans contributed to a DC plan in 2010, while 79% of whites and 80% of Asian workers did so. Even when adjusting for factors such as age, salary and tenure, African-American and Hispanic employees were significantly less likely to have established a DC plan account.

Across all racial and ethnic groups, participation in DC plans dramatically increases when you compare those who are subject to automatic enrollment versus those who are not. When auto-enrolled, 82% of African-American employees participated in a DC, compared to just 64% of those not subject to auto-enrollment.

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