A federal pension advisory panel is pressing the U.S. Department of Labor to issue new guidance to address systemic issues that prevent workers of color, ethnic minorities, and women from saving as much for their retirement as their White, male colleagues.
The Employee Benefits Security Administration, DOL’s employee benefits arm, should also update regulations that establish the years or hours of service required to qualify for private-sector retirement, to better reflect the changing, service-oriented gig economy, the ERISA Advisory Council said in an annual report it submitted to Labor Secretary
The advisory council’s recommendations establish a framework of ideas that, if enacted, would elevate the agency’s role in helping to encourage workers to save and to ensure equity in access to retirement benefits. It comes as the agency is working on a proposal to broaden the kinds of financial advice that would qualify under a strict, fiduciary standard.
The panel called for greater efforts to combat the retirement gap, writing that “individuals whose compensation or career opportunities have been impacted by racism, sexism, or implicit bias may face acute disadvantages in amassing adequate retirement support.”
It recommended the agency expand its subregulatory guidance on state-based retirement programs to account for new plan designs and simplify its legal standard for financial advice. Those updates would help encourage employers to band together to start new, low-cost plans and aid workers in better understanding when and how much they should save for retirement.
The panel, which is composed of employee benefit practitioners, advises the Labor Department on issues relevant to the Employee Retirement Income Security Act of 1974 (Public Law 93-406) but is limited to offering recommendations. A department spokesperson didn’t provide a response when asked about the panel’s recommendations.
Only about half of American workers are participating in a retirement plan, and access to workplace savings is trending downward as companies make the switch from traditional, defined-benefit pensions to cheaper 401(k)s. That’s had a compound effect on workers of color and women, who already earn lower wages on average and, in some cases, face discriminatory hiring practices. If those workers don’t save now, they could strain state and federal safety nets once they reach retirement age.
The panel made similar recommendations in 2010, but EBSA acted on only a few them. The agency enhanced its voluntary collection of data and promoted financial education opportunities among communities of color.
“Data show that people of color, ethnic minorities, and women often find themselves with lower retirement savings compared to other workers in the same occupation,” the panel’s report said.
In 2020, the Government Accountability Office also found that wealth and income disparities can hinder women and people of color from generating long-term retirement wealth.
Women Lack Equal Access
The panel recommended the agency work with state courts to eliminate hurdles divorced workers face in obtaining judicial orders to split retirement benefits with their former spouses. Although qualified domestic relation orders are granted at the state level, the council said federal regulators should draft model language states can use.
Spousal benefit access affects women more than men, the panel said. But retirement plan sponsors usually communicate directly with plan participants only, which can leave their spouses out of the loop, especially if a couple is separated or divorced.
The process for obtaining such court orders “is not well understood by the public and even by many professionals,” the panel said. “As a result, many spouses, particularly in moderate- and lower-income households, are not in a position to divide a pension at all.”
Similarly, the panel urged the agency to encourage plan sponsors to treat leaves of absence from work as continuous service. Women who take maternity leave face a disruption in pay that can affect their ability to make retirement contributions or get them kicked out of their workplace plans altogether.
Regulatory action may be premature, it said, but some evidence shows that retirement plans that rely solely on brokerage windows and don’t provide a tailored investment menu could put inexperienced workers at risk of mishandling their retirement savings.
Brokerage windows give retirement plan participants access to the broader investment marketplace through their workplace 401(k). Workers can usually choose to invest a portion of their savings in a self-directed brokerage window as if it were an individual investment option on the menu.
The Labor Department has been concerned plan officials might use brokerage windows to dodge disclosure requirements, but recordkeeping firms don’t want the added responsibility of having to keep up with participants’ activity outside of a 401(k)'s vetted and approved investment options.
The advisory panel said more research and data collection would be needed to determine whether those concerns are warranted.