Workplace savings program could shrink wealth gaps: report

The median amount of retirement savings varies by race and ethnicity, and employers have the means to bridge those wealth gaps. That’s according to a recent report from the AARP Public Policy Institute. 

The study is based on data from a survey of 1,491 US adults aged 18 or more years that was conducted by NORC at the University of Chicago in December 2020. The sample included 1,030 respondents who self-identified as white. The number of Black and Hispanic respondents was somewhat low, so the groups were combined into one sample of 335 households. Of the total number of respondents, 606 participants had household incomes of $45,000 or less.

One solution to shrinking the savings gaps is an automatic individual retirement account, also known as an auto IRA. This model combines a payroll deduction IRA with automatic enrollment that includes a feature for emergency savings. The researchers noted that the auto IRA model significantly increased wealth across demographics, especially for Black and Hispanic households.

Auto IRAs differ from 401(k) plans in that they are not considered retirement plans, so they are exempt from Employee Retirement Income Security Act rules, the report noted. Auto IRAs, however, are not available in all states. According to the AARP’s previous coverage, only 19 states have enacted “work-and-save programs.” The AARP estimates that a universal auto IRA with emergency savings could increase the amount of overall national retirement savings by trillions.

“The ability to use payroll deduction to save for the future, and to use some of those reserves to meet inevitable financial emergencies, is key to increasing household wealth,” according to the report’s authors.

Auto IRAs are one solution for smaller companies that cannot afford to offer a pension plan, according to the AARP. 

“The Auto IRA allows small businesses to offer the same type of features to their employees as those of larger employers, through a simple, low-cost program,” the authors said. “Further, the presence of emergency savings as either part of the Auto IRA or as a separate, automatically enrolled account reduces the chance that an unexpected expense will destabilize family finances.”