How Secure Act 2.0 aims to help people of color start investing for retirement

The Secure 2.0 Act aims to help Americans save for retirement through new policy changes and government incentives, but one provision taking effect next year is working toward something more: narrowing the racial wealth gap.

Section 101 of Secure 2.0 requires companies to automatically enroll eligible employees into 401(k) or 403(b) plans, starting after Dec. 31, 2024, citing auto-enrollment’s effectiveness at boosting the participation rate in workplace retirement plans for Black, Latino, and lower-wage employees.

Participating in a retirement plan through work may be one of the easiest ways to prepare for the future, but historically, participation has varied. A 2023 study by T. Rowe Price found that participation in an employer-sponsored retirement plan was highest for white people at 57.7% but lowest for Black people at 40.5% and Hispanic people at 31.9%.

That auto-enrollment provision is well-intentioned, says Yemi Rose, but it needs to be part of a bigger solution.

“I don’t think anybody’s surprised to say if we automatically enroll people that we’re getting more enrollment,” says Rose, the Maplewood, New Jersey-based founder of OfColor, a startup that supports employees of color in building financial awareness. However, he says that getting enrolled and participating in a retirement plan in and of itself doesn’t solve the hard, more pressing money issues.

One driver of retirement inequality could be income inequality. According to the Federal Reserve 2022 Survey of Consumer Finances, white families had an average pre-tax income of $164,550 compared with $70,950 for Black families and $71,550 for Hispanic families.

With less money to begin with, challenges such as inflation, higher interest rates and student loan repayments can put a lot of demand on the dollars coming in, says Greg Ward, a certified financial planner with Financial Finesse based in Charlotte, North Carolina.

He says common financial priorities for communities of color also include providing for family at home or overseas, and saving for their children’s education.

When there’s pressure to meet current financial obligations, skipping retirement savings or dipping into them might seem to offer relief, Ward says.

A 2023 report by the Sloan School of Management at MIT found that Black employees were twice as likely as white workers to take an early withdrawal of at least $1,000 from their retirement savings. Hispanic workers were 21% more likely.

Another Secure 2.0 provision, effective this year, removes tax penalties for some hardship withdrawals, but that’s sticky, too, said Hui-chin Chen, a certified financial planner and managing partner at Pavlov Financial Planning in Arlington, Virginia, in an email interview.

“Flexibility to withdraw may be an incentive to contribute to retirement accounts,” she said. “However, having that flexibility doesn’t mean you should exercise it when you don’t need to. Investing for the long-term in retirement accounts is still recommended.”

Beyond competing financial priorities, a lack of trust in institutions may also cause some to hesitate before participating in a retirement plan.

Chen said that immigrants who have arrived in the U.S. as adults have less time to save for retirement, and they might be more hesitant to take advantage of a retirement system they do not understand.

Rose also says lack of institutional trust can play a role in 401(k) participation rates. A worker might start a job expecting to see a certain amount in their paycheck, and when it’s less than they thought because of 401(k) deductions, they might get upset, he says.

“It’s a confirmation bias like, ‘Oh, my goodness, they’re taking more money from me.’”

Despite reservations about auto-enrollment, Rose says he still went to Capitol Hill to push for Secure 2.0 to be passed.

“In one sense, yes, we have more people enrolled,” he says. “But at the same time, you might also start to see more distributions in the form of a hardship or a loan. So you really have to kind of solve it from both ends.”

Part of that solution is raising financial awareness and literacy in communities of color, especially when it comes to preparing for retirement, he says.

Jamia Erickson, a senior financial advisor at Thrivent, based in Rochester, Minnesota, suggested small steps for those who find it hard to save for retirement by taking advantage of compound interest.

“I know it sounds cliche, but it works,” she said in an email interview. “Even if it’s $25 a month, start contributing to a retirement account.”

And while Erickson said that people shouldn’t rely on legislation when it comes to their future, she does tell people to ask questions of financial advisors and to do their research.