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Racial divide in savings

New study of investment practices reveals African-Americans more often shun stocks, leaving blacks behind whites in building nest egg

Gail MarksJarvis

On Money

October 12, 2007

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If middle- and upper-income African-Americans continue to save and invest the way they tend to do, they stand to struggle financially through retirement in greater proportions than whites at similar income levels.

On average, black Americans are saving less for retirement than whites, and close to half shun the stock market, according to a study released Thursday by Argosy Research for Ariel Mutual Funds and Charles Schwab Corp. Consequently, the money saved by black investors is not positioned to grow with the power that comes from stocks and stock mutual funds.

The survey found that the average savings for blacks Americans earning $50,000 or more a year is $48,000, compared with $100,000 for whites with the same incomes and educational backgrounds. And while 76 percent of whites invest in stocks or stock mutual funds, only 57 percent of black investors do.

Ariel and Schwab started surveying middle- and upper-income people by race a decade ago, believing cultural differences were creating disparities in investment practices.

"Both whites and African-Americans are failing to save enough, but if Americans have a cold, African-Americans have pneumonia," said John Rogers, an African-American who is the founder of Chicago investment firm Ariel Capital Management.

One possible solution, experts say: more education, such as Ariel's support of a school in Chicago that teaches children about money.

In 401(k) plans, where people save money for retirement at their workplaces, the contrast between black and white investors is stark, Rogers said.

On average, blacks at age 42 have $11,000 saved for retirement, while whites have $48,000, Rogers said. He drew the numbers from a survey of 21,000 401(k) plans by the Great-West financial services company.

If each one of those people were to save another $2,000 a year and invest all the money in a stock market mutual fund, those with $11,000 could end up roughly with $195,115 at retirement, while those with $48,000 would have about $413,400.

This assumes that each would earn about 8 percent annually in the stock market on average. But the Ariel research suggests that many black investors probably would earn less than that.

According to the survey, only a third of black investors said stocks and mutual funds were the "best investment overall." Half preferred real estate, which historically has not consistently provided returns as high as stocks.

In 2002, 74 percent of African-Americans were investing in stock or stock funds. At the time, 82 percent of whites were doing the same.

As the stock market plunged, both races pulled away from the stock market, but the retreat was significantly higher among black investors.

Chris Long, a black financial planner in Chicago, said he recently talked an African-American couple into returning to a diversified portfolio of stock and bond mutual funds. They had been frightened by the downturn in 2002 and withdrew from stock funds, but they realized their savings were not growing adequately, he said.

"Culturally, African-Americans aren't comfortable in the stock market," Rogers said.

As a young broker years ago, Rogers said, "White friends came to me with stocks they had inherited from aunts or grandparents, but black friends came with nothing." Their families hadn't had the types of jobs or businesses that provided experience with investing, he said.

"There was no lifetime experience, and that's a big thing," he said.

"There weren't discussions about the stock market around the dinner table," said Lisa Toppin, vice president of human resources at Schwab.

In the survey, most black respondents said they are getting their first experience with investing in 401(k) plans at work. And that is a relatively new trend. In the past, black employees often have worked in jobs that provided defined-benefit pensions, but those plans are fading away.

Rogers said one reason black investors may have felt stung so badly by the 2002 market crash was their choice of mutual funds. He said research shows that black investors often do not hold multiple types of funds to diversify and decrease risk in downturns. On average, blacks choose 1.7 funds in their 401(k), compared with 3.7 among whites.

Ariel and Schwab are calling on businesses to do more to educate employees about 401(k)'s or other retirement savings plans in the workplace. And they are encouraging businesses to support financial education in schools.

Ariel supports the Ariel Community Academy, a school on Chicago's South Side. The school teaches saving and investing to children from pre-kindergarten through 8th grade. As they progress, they are actively involved in investing money.

Both Rogers and Toppin lauded McDonald's Corp. as an example of a company that has undertaken efforts to increase 401(k) participation among black employees.

McDonald's noted four years ago that participation in the company 401(k) plan was lower among minority restaurant managers than white managers. To build up participation among both groups, the company increased pay levels by 1 percent and had managers invest the raise in a 401(k).

They were allowed to opt out if they wished, but every $1 the managers put in the plan was matched by $3, said Rich Floersch, executive vice president of human resources.

Larger savings are rewarded with even higher percentages of matching money.

In addition, McDonald's has provided advisers to help employees select mutual funds, and minority employees meet with peers to discuss saving and investing.

Floersch said participation in the 401(k) plan by African-Americans has climbed to 95 percent from about 50 percent.

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gmarksjarvis@tribune.com