The Looming Retirement Crisis in the African-American Community

I don't lose sleep about a lot of things but when I think about the retirement crisis facing middle-and upper-income African-Americans, I become a certified insomniac.

After struggling so long to join the middle class and fulfill the American dream, millions of African-Americans are at risk of falling behind in their golden years. Ten years of research on the saving and investing habits of African-Americans and Whites who earn at least $50,000 annually show that median savings for Blacks is just $48,000 compared to $100,000 for Whites.

The ages of those surveyed were roughly the same (50 for Blacks and 52 for Whites) and they had comparable income levels ($75,000 for Blacks and $81,000 for Whites). When you do the math, factoring in monthly savings rates and a modest annual return of 8 percent, both groups will be far short of what they need to retire at 65 with anything close to their current income level, even with Social Security.

Research conducted by my company, Ariel Mutual Funds--which we commission in partnership with Charles Schwab Corporation--further shows that only 57 percent of Blacks own stocks or mutual funds compared to 76 percent of Whites. In short, large segments of the Black community are simply not participating in a serious way to build wealth to secure their retirement. Not only will my community face our own retirement crisis, but we will be a burden to our children, who in turn will forgo their own investing to support us -- and thus the cycle will be self-perpetuating.

The story gets gloomier when you consider the fact that only 20 percent of private sector jobs today offer traditional pensions -- down from 40 percent in 1980. Most private sector companies have switched to 401(k) plans which mean more and more people are now on their own when it comes to saving for retirement.

At the same time we are all living longer -- 17 years on average for those who retire at 65. And according to a study from Fidelity Investments, a typical couple faces an average of $215,000 in health care costs once retired.

The shift to 401(k) plans requires people to actively decide to become an investor, find advice, calculate retirement savings, make investments, save every month, and review their portfolio on a regular basis. Our research shows that while everyone is behind, Blacks are far less prepared for this new reality than Whites. Put another way, we have given people the keys to the car but we have not taught them how to drive.

Our research and our experience also suggest that employers are in the best position to help their employees understand their retirement and investing options and that a proactive corporation can dramatically boost participation levels in company-sponsored 401(k) plans. Ariel Founder and Chairman, John W. Rogers, Jr., serves on the board of McDonald's Corporation. He asked the company to analyze plan participation by race in their company-sponsored 401k plan. McDonald's learned that only half of their Black restaurant managers were participating and that the average amount saved was half that of White managers.

McDonald's launched a marketing campaign to enroll more Black managers, boosted the company match by one percent, gave the managers a small raise to reduce the impact on their take-home pay, and within three years, they had increased participation levels among Black managers to 95%, and increased overall savings by 42%.

We have asked other employee benefits providers and corporations to analyze participation by race and they are all finding the same thing: their Black employees save less per month, they are less likely to diversify their portfolio, they are less likely to roll over when they change jobs, and they are more likely to borrow against their 401(k) - all troubling habits that undermine their long-term financial security.

The lack of knowledge and exposure to investing among African-Americans represents an emerging national crisis that will add to the already growing financial burdens facing our society. These facts argue for a concerted national effort to promote financial literacy - in the Black community and in every community. It should be taught in every classroom, promoted in every workplace, and discussed at every dinner table.

With a national election underway and the promise of new leadership in the White House, now is the time for our national candidates to develop practical policy solutions to the emerging retirement crisis. The baby boomers are about to begin retiring in historic numbers. American is not ready.