Retirement Plan Redesign Can Help Latinos Save More

By Nancy Wilberg Ricks, Senior Policy and Communications Strategist, NCLR

Photo: www.aag.com, http://ow.ly/IYcvj

Photo: www.aag.com, http://ow.ly/IYcvj, Creative Commons

Studies indicate that Latino households prioritize longer-term financial goals over immediate consumer purchases. Regardless of income level, Latino families tuck away money for their children’s education, to support an elderly relative, to invest in a home, or even to gain U.S. citizenship.

Despite their strong savings habits, Latinos devote funds to retirement accounts at lower rates than their peers. The biggest barrier Latinos face when saving for retirement is a lack of savings options. Two-thirds of Latinos work for employers, oftentimes small businesses, that do not offer private retirement plans. But even among individuals who do have an employer-based retirement plan, usually a 401(k), Latinos maintain the lowest retirement savings among their peers. Within the same salary bracket, Hispanics saved 35 percent less than their White counterparts.

Smarter retirement plan design can ensure that by devoting “investment” dollars toward supporting friends and family, Latinos are not trading their financial future for that of others. First, companies that automatically enroll employees into a 401(k) typically have much higher participation rates. In a study conducted by Professor David Laibson of Harvard University, participation rates under a voluntary enrollment system, which was at 20 percent, increased dramatically to 80 percent after automatic enrollment was implemented. Similar results were found when auto-enrollment was adopted by other companies, including those with high numbers of low-income workers. President Obama’s fiscal year 2016 budget proposes to incentivize employers that have 100 or fewer workers with a $3,000 tax credit for offering automatic enrollment.

Second, businesses that enroll employees at levels higher than the average default contribution—the minimum amount deducted from paychecks for retirement plans—can give their employees a leg up on savings. Since many workers forget to increase their 401(k) contributions as their earnings rise, some responsible companies automatically escalate contributions over time.

Photo: http://401kcalculator.org, Creative Commons

Photo: http://401kcalculator.org, Creative Commons

A third feature that could boost Latinos’ retirement savings is a stronger match for employee contributions. Not every employer matches employee 401(k) contributions. Policy incentives for companies that provide a match hold promise, as do proposals for direct government matches, such as a refundable retirement tax credit. Given the low awareness of the existing Saver’s Credit—only 24 percent of American workers who qualify are aware of the credit—public education about any new tax benefits is essential.

Further complicating matters, the Saver’s Credit is nonrefundable. That means it offers no real incentive to save for the tens of millions of modest-income filers who qualify on paper for the 50 percent credit rate but who have no income tax liability against which to apply the credit. Making the Saver’s Credit refundable could get closer to the spirit of the policy and help millions.

These proactive measures, along with more strategic outreach, can improve retirement outcomes for Latino households. Latinos with modest incomes are already saving for a rainy day. Redesigning retirement plans can channel those dollars toward longer-term benefits for the entire family.

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