Continued economic uncertainty has led many workers to dip into their retirement savings, but minorities have been the hardest hit, according to a report by the Ariel Education Initiative (a nonprofit affiliate of Ariel Investments) and the human resources company Aon Hewitt.

Even more so than their Asian and white counterparts, African-American and Hispanic employees are eroding their retirement savings at an alarming rate, according to the study, 401(k) Plans in Living Color II. The report examines the defined contribution plans of 60 large U.S. companies, representing some 2.4 million employees.

The prolonged economic crisis and resulting financial challenges have led many workers to tap into their retirement savings to alleviate short-term financial stress, the report says. More than two-thirds of workers who took withdrawals in 2010 said they needed the money for an unexpected emergency, to tackle debt or just to handle day-to-day living expenses. More African-American employees took hardship withdrawals than any other ethnic group that year-8.8% of them, while only 3.2% of Hispanics did, 1.7% of whites and 1.2% of Asian workers.

Loans taken against DC plans can seem attractive, but they hurt families' ability to save for retirement. While more people across the board take loans during tough economic times, the disparity among racial and ethnic groups is alarming. Half of all African-Americans and 40% of Hispanic employees carried a loan balance at the end of 2010, compared with 22% of Asians and 26% of whites, according to the study.

"The Great Recession caused many employees to tap into their 401(k) plan," said Mellody Hobson, president of Ariel Investments. "This has been especially true of African-American and Hispanic workers who have been hit the hardest by the recession. Since 401(k) plans have become the primary way Americans save for their golden years, this study dramatically shows how much is at stake."

The vast majority of workers who leave their employers with a loan outstanding-80% of African-Americans, 76% of Hispanics, 71% of whites and 67% of Asians-subsequently default on them. Because loans account for an average of 20% of a worker's balance, those who default suffer a significant financial setback.

Workers also put their retirement savings at risk when they cash out, liquidating their balances and simply taking the money. An estimated 63% of African-Americans did this when they left their employers in 2010, while 57% of Hispanics did. Only 39% of white employees and 34% of Asian workers cashed out.

"Most employees who cash out their savings will never be able to rebuild their balance," Hobson said. "Minority workers disproportionately affected by layoffs feel like they have no choice other than drain their retirement savings in order to make ends meet while unemployed."

A key element in helping workers save for retirement is getting them to participate in a savings plan. The study also found a racial gap in DC plan participation. Just two-thirds of Hispanics and 68% of African-Americans contributed to a DC plan in 2010, while 79% of whites and 80% of Asian workers did. Even when the figures are adjusted for factors such as age, salary and tenure, African-American and Hispanic employees were much less likely to have established a DC plan account.

In an effort to encourage all workers to participate, employers have increasingly adopted automatic enrollment features. An estimated 67% of employers in the study automatically enroll new hires, up from 58% in 2007. This push toward auto-enrollment is making a difference, the report says.
Aon Hewitt is the global human resources business of Aon Corporation. The Joint Center on Political and Economic Studies and the Raben Group also collaborated on the study.

--Jim McConville