When policymakers came up with a plan to help older workers boost their retirement savings by allowing "catch-up" contributions, it probably seemed like the perfect fix. After all, who wouldn't want to sock away more tax-deferred money for later in life?
Plenty of people, it turns out. Researchers at Boston College's Center for Retirement Research studied the effect of allowing those 50 years and older to make higher 401(k) contributions. They found that they're used almost entirely by a small minority of the millions of people saving through the retirement plans—and they are not the people who need it most.
The catch-up contribution, which allows employees over the age of 50 to contribute an extra amount to their 401(k) beyond the standard limit, came into being as part of the Economic Growth and Tax Relief Reconciliation Act of 2001. Employers are not required to offer this feature to employees, but some 97 percent of them do, according to the Plan Sponsor Council of America. In 2015, every employee is allowed to contribute up to $18,000 to a 401(k), but employees over age 50 can contribute another $6,000, or 33 percent more.
For people who can afford to make catch-up contributions, the effect can be powerful. Jean Young, a senior research analyst at the Vanguard Center for Retirement Research who has studied this retirement plan feature, found that 42 percent of people earning $100,000 or more are taking advantage of it. Even for someone earning $150,000, that amounts to a 16 percent savings rate.
But the Boston College center found that just 9 percent of participants in 401(k) plans contribute within 10 percent of the maximum. And not surprisingly, they are better off: Their average income and net worth were $163,000 and $439,000, respectively, while mean income for 401(k) savers overall was $57,000 and net worth was $200,000. (Tweet This)
"Further tinkering with the contribution limit for 401(k)s would likely affect only a very small group of people; it does not offer a broad-based solution for low saving rates in the United States," the researchers concluded.