Hispanics are the fastest-growing demographic group in the U.S. They're also among the least likely to invest and keep money in 401(k)s and other retirement-savings accounts, recent reports show.
Sensing a business opportunity, several large financial-services companies are making a greater effort to engage Hispanic workers, believing they could become an important segment of the U.S. investor base.
But convincing this group to invest and keep money in 401(k)s and similar accounts could prove challenging, some academics and retirement experts say. Not only do many Latinos work in low-wage industries, but the idea of accumulating funds for one's elder years doesn't always mesh with a culture that emphasizes individuals taking care of one another.
"Retirement is a foreign concept for many Hispanic workers," says Elli Dai, director of participant services at Wells Fargo Institutional Retirement and Trust, a unit of Wells Fargo WFC +0.29% & Co. "The focus is on providing for the extended family, and they expect their family to take care of them when they're no longer working."
A Sleeping Giant
There were 50.5 million Hispanics living in the U.S. in 2010. Just 10% of them have individual retirement or Keogh retirement accounts, and 24% have 401(k) or thrift accounts, according to a report released in late July by the Pew Hispanic Center, a nonpartisan think tank. By comparison, among whites, 35% have IRAs or Keoghs, and 45% have 401(k)s or thrift accounts.
Studies say lack of access is a big part of the problem: Either because of their immigration status or the types of jobs they hold, Hispanics are among the least likely group to have access to a retirement plan.
But even when they do have retirement accounts, Hispanic savers are among the most likely to take out loans or hardship withdrawals, incurring taxes and additional penalties that eat into their savings, studies show. According to a study by the Ariel Education Initiative—the nonprofit arm of Chicago money manager Ariel Investments—and Hewitt Associates LLC, nearly one-third of Hispanics with 401(k) accounts had outstanding loans against those accounts in 2007, compared with 20% of white workers. Hispanics also were 50% more likely than whites to take hardship withdrawals from their plans over the same time frame, the study found.
Even at the highest income level counted in the Ariel/Hewitt survey—a salary of $120,000 or above—Hispanics had the least amount saved for retirement: an average of $150,000, compared with $155,000 for African-Americans, $161,000 for whites and $223,000 for Asians.
"For many, [planning for retirement] is an area that's completely new," says Arnoldo Mata, director of research at the Hispanic Institute, a Washington, D.C., nonprofit that aims to educate the Hispanic population about consumer and civic issues.
Brokerage firm Edward Jones is among the companies trying to change that dynamic. In addition to recruiting more Latino staff, the firm is sponsoring conferences held by groups such as the National Society of Hispanic MBAs and the Association of Latino Professionals in Finance and Accounting in an effort to highlight its investing philosophy and attract new clients.
"We haven't had a long history with a Hispanic work force or client base," says Emily Pitts, a partner and chief diversity officer at Edward Jones. But the firm wants to "ensure we're not omitting an opportunity that we haven't really capitalized on yet," she says.
ING Groep NV ING +0.62% has been holding seminars for small-business owners in markets with large Hispanic populations to explain the recruiting and retention advantages that come with offering employees retirement plans. ING also has retooled the way it works with Hispanic employees who already have access to such accounts: Instead of merely translating documents into Spanish, ING has rewritten the material specifically for Hispanic savers.
For example, in many Spanish-speaking countries, saving for retirement isn't a common practice, says X. Rick Niu, chief marketing officer for ING's retirement business. Instead, families tend to save for important life-cycle events like weddings, he says. So when sending out information about an employer's 401(k) plan, ING starts by explaining whyit's important to save for retirement. ING also boosted the number of bilingual customer-service representatives after finding that Hispanic customers tend to spend more time on the phone than other groups.
The approach has been successful, Mr. Niu says. At one employer, which declined to be identified, 401(k) participation among Hispanic employees rose to 61% from 27%, he says.
Wells Fargo, meanwhile, found that Hispanics tend to look to leaders within their communities for financial guidance. So the company now gives extra information about its retirement plans to workplace leaders—those employees who are most respected by their peers—to ensure they fully understand the plans and can explain them to colleagues who ask for help.
Wells Fargo also pushes the idea that having retirement savings helps the family: "You can contribute [to your family] even when you're not working anymore," says Ms. Dai.
A Big Challenge
Still, some academics say the focus on 401(k)s for greater retirement security isn't working—as reflected in the big sums that are withdrawn by Hispanics long before retirement age.
Because Hispanic workers tend to be in lower tax brackets, paying taxes on those early withdrawals isn't daunting, says Teresa Ghilarducci, a labor economist at the New School for Social Research in New York. And because the pull of family is so strong, the 10% withdrawal penalty under tax law also isn't a deterrent.
The Latino community's "family ties and strong communities dovetail very badly with the features of the 401(k)," says Ms. Ghilarducci.
A better option, she says, would be for employers and banks to impose stricter limits on when employees can withdraw money from their employer-sponsored retirement accounts. Keeping company contributions locked up until the worker retires, for example, would be one way to prevent the account from being completely drained, she says.
Karen Richman, an anthropologist at the University of Notre Dame, suggests banks learn from—and perhaps mirror—the "informal banking practices" of the Hispanic community. She points to a concept called a "tanda" account, in which informal groups of people contribute to a pool of money, and each takes a turn withdrawing funds at an assigned time.
Second Federal Savings, a community bank that serves the large Latino population on the southwest side of Chicago, considered formalizing tanda accounts as a retirement option, but shelved the idea during the economic crisis. Still, Mark Doyle, the bank's senior vice president for community development, says tandas could present a viable way for banks to encourage Latinos to save for retirement. "It's very difficult to get people in this market to think about retirement and retirement savings," he says. So it makes sense to build off of a "savings vehicle [that] has been around for centuries."