How 401(k) Plans Have Fueled Inequality in America

Photograph by Howard Sokol/Getty Images

Wages aren’t rising, but the stock market sure is. It’s starting to feel like a Piketty world, in which the owners of capital get richer and leave everyone else behind. A recent study suggests it might be even worse than that: The masses aren’t just being left out of the market—they’re getting pummeled by it.

According to the Wall Street Journal, bad market timing may explain the postrecession increase in wealth inequality. Many low- and-middle income Americans bought stocks at high prices when the market last peaked, sold low when it tanked, never got back in, and missed out on the rally. The figure below shows the share of Americans who owned equity (either directly or through their pension accounts) among top earners in the 90th percentile (more than $175,000 in annual household income in 2013); middle earners ($30,000 to $99,000); and lower earners in the 25th percentile (less than $30,000):

The number of stock-owning middle and low earners rose around market highs (2001 and 2007), then dropped off after each crash. The share of middle- and low-income stock owners has been down since the recession, depriving them of the recent market gains. Meanwhile, high earners stuck with the stock market all along and got richer.

Lower- and middle-income Americans got burned by the market; that’s a consequence of why they owned stock in the first place. In 1989 just 33 percent of middle-income Americans owned stock, compared with 57 percent in 2013. Most of the increase in stock ownership can be attributed to the rising popularity of 401(k)-type retirement savings accounts. The figure below plots the share of Americans who own stock and those who have a defined-contribution pension account.

Since defined-contribution plans are many families’ primary source of savings, participation in these plans also fell after the recession, as many people raided their accounts and sold stock. A report from Fidelity estimates one in three workers cashed out their 401(k) when they changed jobs in 2012. Research from the Federal Reserve estimates one in four pension participants under 55 took money out of their accounts. Withdrawals were more common among lower earners, especially if they lost their job or got divorced.

A 401(k) world means more Americans own stock. In some ways that’s a positive trend, because it means more own a piece of the country’s rising wealth. But the danger is since wages haven’t increased and many lack other sources of savings, Americans turn to their 401(k)s when times get hard, which incurs both immediate penalties and long-term consequences. A tried-and-true rule of investing is to never invest your emergency fund in risky assets; when people turned their 401(k)s into emergency savings, they got hammered by the market.

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