The Yield Disparity in 401(k) Plans: Does Higher Annual Pay Mean Higher Rates of Return on Retirement Accounts?

25 Pages Posted: 8 May 2009

See all articles by Matthew R. Morey

Matthew R. Morey

Pace University - Lubin School of Business - Department of Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 3, 2009

Abstract

This study examines whether more highly paid workers have significantly higher rates of return on their 401(k) retirement accounts than lower paid workers. This topic received considerable attention when Brooks Hamilton, a prominent benefits consultant, stated on the PBS program Frontline that the top 20 percent of 401(k) plan participants in terms of pay had investment rates of return on their retirement accounts that were from five to seven times higher than the bottom quintile of plan participants in terms of pay. He coined this difference in the rates of return the “yield disparity”. Using a sample of over 500,000 observations over the period 2002-2007, and controlling for age and gender, we find that the lowest paid workers do in fact earn rates of return on their 401(k) that are significantly less than the rates of returns earned by higher paid workers. However, the magnitude of the yield disparity between the poorest and richest quintiles is much smaller than that found by Hamilton. Rather than five to seven times the returns, we find that the return difference is on average about two percent per year; which still a significant difference but not nearly as great as suggested. After documenting the difference in the rates of return, we then examine assets held and loan activity. We find, consistent with the previous literature that workers who earn in the bottom 20 percent in terms of pay hold significantly less- risky assets in their retirement portfolios and are more likely to borrow from their retirement balance.

Keywords: 401k, yield disparity, rate of return, retirement accounts

JEL Classification: G31

Suggested Citation

Morey, Matthew R., The Yield Disparity in 401(k) Plans: Does Higher Annual Pay Mean Higher Rates of Return on Retirement Accounts? (May 3, 2009). Pace University Finance Research Paper No. 2009/06, Available at SSRN: https://ssrn.com/abstract=1398385 or http://dx.doi.org/10.2139/ssrn.1398385

Matthew R. Morey (Contact Author)

Pace University - Lubin School of Business - Department of Finance and Economics ( email )

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HOME PAGE: http://webpage.pace.edu/mmorey/

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