Why catch-up contributions don't work for many savers

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 plansand 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.

Read MoreFor millions of Americans, the 401(k) is a failure

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Employers are trying other ways to encourage employees to save for retirement, like automatically enrolling new employees in 401(k) plans. Vanguard has studied this approach, and it found that participation among new hires was 91 percent when they were automatically enrolled, compared with 42 percent when they had to enroll voluntarily.

Other companies are automatically escalating the amount employees contribute. And some are doing both.

These automatic features can be powerful. Yet too often, the way they are designed falls short of the mark, according to Young. For example, half the plans she studied that offered automatic enrollment had a default contribution rate of just 3 percent, and employees are highly likely to stick with whatever the default rate is: just 10 percent tend to opt out even at default rates as high as 6 percent.

"At the end of the day, for over half of these participants, the design the sponsor chooses is the design they have three years later," she said.

Because people stick with default contribution levels, low rates may actually limit what people are saving. And in fact, Vanguard's research has shown that savings rates are lower in plans with automatic enrollment.

Read MoreThe downside of automatic 401(k) enrollment

As for how 401(k) participants responded to automatic escalation, Young found that they were also likely to stick with default rates and levels. But employees participating in plans without automatic escalation were more likely to "override" the plan design and increase their contribution rate than were employees in plans that had some automatic escalation, she said. As with automatic enrollment plans, the default levels were key to how much people actually contributed.

Young is hopeful that features like automatic enrollment (at higher default levels) will ultimately move the dial on retirement savings. They clearly affect participation, she said.

"The structure of automatic enrollment is really powerful, but we need to get the levels right," she said.