Minorities invest less; the real question is why

For more than a decade, Chicago-based Ariel Investments has examined the investing habits of African-Americans. The company has made it part of its mission to increase minority participation in the stock market and 401(k) plans so minority investors will have a secure retirement.

Now, Ariel Education Initiative, the company’s nonprofit affiliate, and Hewitt Associates, a human resources consulting firm, have released what they describe as a groundbreaking study showing that minorities still aren’t investing in corporate 401(k)s at the same rate as whites and Asians.

The two companies found after analyzing 401(k) information for nearly 3 million employees at 57 large, primarily Fortune 500 businesses, that regardless of age or income, African-American and Hispanic workers have lower participation rates and contribute less to their 401(k) plans than their white and Asian counterparts.

Specifically, 66 percent of African-American employees and 65 percent of Hispanic employees participate in their company’s defined contribution plans, compared to 77 percent of white workers and 76 percent of Asian workers.

The study also showed that African-American and Hispanic workers had higher rates than white workers of borrowing from their retirement accounts. Asian workers were the least likely to take a loan against their 401(k) plans, with less than one in five doing so, the report found.

I don’t doubt Ariel’s commitment to investor education. But we’ve known for at least 10 years that minorities are not investing at the same rate as whites. The more pertinent question is: Why is there still a gap?

That’s a question the study doesn’t answer. Neither does the joint news release from the two companies, or most media reports.

In an interview, Mellody Hobson, president of Ariel Investments, said she believes minorities are investing less for five reasons:

  • They don’t know enough about investing.

    They have misinformation about investing in a 401(k) plan.

    They have trust issues.

    When they do invest, minorities choose more conservative options such as investing in real estate and insurance products.

    They have less exposure to the stock market.

    Every reason Hobson listed reflects on the investing acumen of minority investors. However, studies show many companies haven’t done the best job of explaining investment options or providing advice to all of their 401(k) participants. Is it so hard to appreciate that many new investors would be leery of investing their money in the stock market, especially of late? And the numerous scandals in the investment community don’t exactly engender trust among a group of people who have experienced institutional mistreatment for decades.

    What I’m sure Ariel and Hewitt would find if they dug deeper is that class, culture and socioeconomic conditions are determining factors in how much people invest. For example, are the data comparing first-generation minority investors to second- or third-generation middle- or upper-income investors?

    First-generation investors may have significantly more debt — such as student loans — than second-generation investors, who may have been able to rely on an inheritance or established investment portfolios to fund a college education for their children.

    First-generation investors may be more likely to use money they would invest to help extended family members. Could it be that some Hispanic employees may be contributing less to their 401(k) plans because they are sending money to relatives here and abroad?

    It’s also likely that first-generation investors are spending more than they should on consumer purchases, which isn’t unusual for a generation new to better-paying corporate jobs.

    And why would African-Americans and Hispanics be borrowing more from their 401(k) plans?

    Perhaps they couldn’t tap their home’s equity for needed cash, as other workers have in the past. We know African-Americans and Hispanics have lower homeownership rates — for a number of reasons — so they may have reached for the only large pot of money they had available.

    Given those many variables, we ought to be wary of these reports measuring minorities against whites. Without a deeper understanding of what motivates investors, the blanks can’t be filled in and companies can’t design appropriate marketing or education programs to boost 401(k) participation.

    So why is it necessary still to compare minorities with whites?

    “It helps to give people a benchmark,” Hobson said. “Overall, Americans can do better at saving for retirement, but minorities are much more at risk.”

    We do need to have conversations about the lower participation rates and find ways to ensure everyone is saving and investing what they should. But if we are going to continue to compare things in black and white (or brown), we need to provide context. Without it, the information leads — as it already has in the blogosphere — to racist invective from people deducing that minorities are just ignorant or spendthrifts or both.

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