• Are 401(k) Plans Discriminatory? Hamilton on Yield Disparity

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    If everyone is offered the same 401(k) plan and is free to make all the decisions themselves, then everyone has an equal shot at success, right? Not according to Brooks Hamilton, a Benefits Consultant with fifty years of experience and tons of historic 401(k) participant data at his fingertips. He sees a pattern in the data: people with higher incomes tend to make better financial decisions regarding their 401(k) plans, and earn a higher ate of return. People with lower incomes tend to make poorer decisions regarding their 401(k) plans and earn much lower rates of return. The group with the lowest 20% of income earned about 4% per year in gains. The group with the highest 20% of income earned about 25% returns per year. This means that the rich are getting richer while the poor are barely keeping up with inflation. Hamilton calls his theory “Yield Disparity“.

    I think there are two reasons for this: education and access to professional financial management. The poorer employees are probably less financially savvy and less able to afford quality financial advice (read The Number by Lee Eisenberg for more on this topic). Wealthier clients may have more experience with financial planning and have better access to a qualified financial planner.

    Hamilton dreams of the day when employees are required to contribute an adequate amount to their 401(k) and have the money professionally managed, courtesy of their employer. But he acknowledges that probably isn’t going to happen anytime soon. In the meantime, if you aren’t getting the returns you want on your 401(k) investments, see if your company’s plan includes access to a certified financial planner.


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