Risk-Taking in a Post-Pension Society: A Potential Mechanism for Generating Wealth Inequality in 401(k) Retirement Plans
36 Pages Posted: 24 Sep 2016 Last revised: 10 Nov 2016
Date Written: October 1, 2016
The introduction of direct contribution 401(k) retirement accounts in the late 1970’s brought about an institutional shift in the relationship between private employers and workers with regard to financial risk and decision making involved with retirement savings, which can impact financial well-being in older age. The role of investment uncertainty on individual risk-taking has been documented, however the importance of socioeconomic status on these decisions has been studied far less. This paper identifies and quantifies an unnoticed mechanism for generating potential inequality within 401(k) plans - based on disparities in employee income and how that results in employees self-selecting riskier or less risky portfolios. Lower-income employees, as a whole, allocate to less risky investments than higher-income earners, and interestingly, those with the highest incomes are slightly more risk averse than might be expected. Also surprising is the result that employees in their 20’s are more risk averse than would otherwise be expected, which may be attributed to a low income being a greater predictor of risk aversion than age. These findings have important implications for the lower income segments of the labor force, as well as for social security and retirement planning policy making.
Keywords: retirement, household finance, 401k, economic sociology, inequality
JEL Classification: A14, D14, D31, G11, J26, J32
Suggested Citation: Suggested Citation