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State IRA programs work toward closing the racial retirement savings gap

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The income and wealth gaps between people of color and white households is wide, but state-run retirement programs are attempting to help workers find parity.

As many as 67% of private industry workers had access to retirement plans in 2020, according to the U.S. Bureau of Labor Statistics. A significant number of employees, however, remain left out of these programs – and it tends to be workers of color who are missing out.

Indeed, about 64% of Hispanic workers, 53% of Black workers and 45% of Asian American workers have no access to a workplace retirement plan, according to AARP. Small employers are also less likely to offer retirement plans to their workers, with about 78% of those who work for companies with fewer than 10 employees lacking access to a plan, AARP found. 

State-facilitated individual retirement account savings programs have stepped in to attempt to close that racial savings gap.

Federal Reserve Board, 2019 Survey of Consumer Finances

“It’s preliminary at this point but the idea was to close the retirement savings gap for people who are left out, and that tends to be lower income workers, workers of color,” said Michael Frerichs, Illinois state treasurer.

Sixteen states have enacted new initiatives to help private sector workers save, and 11 of them have auto-IRA programs, according to Georgetown University’s Center for Retirement Initiatives. As of the end of January, there were more than $735 million in assets in these state-facilitated retirement savings programs, the center found.

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“We’re getting the people who fell through the cracks and don’t have a safety net,” he said, noting that this includes employees at bars, restaurants and grocery stores.

Perhaps the most powerful attribute of the auto-IRA plans is the automatic payroll deduction. “This is the set it and forget it mentality,” said Fiona Ma, California state treasurer. It’s easy for employees to spend the money that lands in their checking accounts, so having a portion of it go directly toward retirement allows their funds to grow.

Workers joining CalSavers begin with a default contribution of 5% of their pay, and they’re subject to an annual automatic escalation of 1 percentage point until they are saving 8% of their salary, according to Katie Selenski, executive director of the program.

“Being able to save and have it accumulate has been a game changer in trying to decrease the wealth gap,” Ma added. She noted that 2 out of 3 workers eligible for the program in California are people of color.

On Jan. 1, the state expanded its CalSavers program to businesses that have one to four employees. If they don’t already offer a 401(k) plan to employees, those employers are required to have a payroll deposit savings arrangement that would allow workers to participate in CalSavers by the end of 2025.

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