Racial divide splits saving practices

Millions of Americans aren't saving enough for retirement, but black and Hispanic investors, on average, are further behind than whites, new research has found.

"It's extraordinarily disconcerting," said Mellody Hobson, president of Ariel Investments, which along with benefits firm Hewitt Associates conducted a study of 401(k) participants.

"No one is doing a good job preparing for retirement, and (minorities) are doing worse," Hobson said. She said people do not want to be a burden to their families but are unknowingly setting themselves up for that.

Although people often assume that insufficient savings are a result of low incomes, Hobson said her research indicates the problems come from such behaviors as waiting too long to start investing, borrowing too much from 401(k) plans and avoiding stocks.

When researchers compared people of similar income levels, they found that black and Hispanic investors accumulated less than whites in 401(k) plans.

Among people earning less than $30,000 a year, blacks had on average $3,900 in their 401(k) accounts. Whites at the same income level had $8,000.

For people earning more than $120,000, whites had built up average savings of $223,000, while black Americans had $154,000 and Hispanic investors had $150,000. Asian investors had more than $161,000.

Hobson said each group makes mistakes that hold them back. Blacks often assume they need to be earning about $100,000 before they can start investing, and whites tend to wait to invest until they are about 35.

Both approaches undermine people's futures because saving small amounts of money early in life is more effective than investing larger amounts later.

Consider a woman who starts investing $2,000 a year in her 20s and does so each year until retiring 45 years later. If she earns 6 percent on her money in the 401(k) on average each year, she will accumulate about $451,000. Yet a person who starts investing $3,000 a year at age 35 and invests $3,000 every year until retiring 30 years later, with the same average return, would accumulate about $251,000, enough to provide roughly $10,040 a year for living expenses, plus inflation adjustments.

Ariel's chief investment officer, John Rogers, is a friend of President Barack Obama's, and Hobson said the study's findings will be submitted to the president's staff along with recommendations that schools and employers do more to educate people about saving and investing in stocks and bonds.

It's a view being trumpeted by leaders in the Obama administration. Securities and Exchange Commission Chairwoman Mary Schapiro said in an interview that financial literacy education is vital to help Americans with everything from investing to selecting mortgages.

Ariel has been studying black and white Americans' investing behavior for years. In 2007, the researchers found that more African-Americans had been frightened away from the stock market than whites after the 49 percent downturn in the market between 2000 and 2002, and many never dared to come back.