The participants 50 or older who have taken advantage of contributing much more of their salary to 401(k) retirement plans through catch-up provisions already were among the highest savers — and so few workers overall are constrained by the annual IRS limits that catch-up contributions aren’t a solution for low retirement savings rates.
Those conclusions come from an academic study released in July from the Center for Retirement Research at Boston College, which said only about 10 percent of 401(k) participants are blocked from saving more by the yearly limits set by IRS.
The escalation, starting in 2002, of higher limits for all and catch-up contributions for those 50 and older did increase contributions from 2002-05, the period studied, but only for those savers near the previous limits, the study said. As part of this escalation by policymakers, total allowable contributions rose to $18,000 in 2005 from $10,500 a year in 2001 for those eligible to make catch-up contributions during that period. (That annual figure stands at $24,000 for 2015.)
The CRR researchers said this muted reaction to greater tax incentives for more retirement saving was consistent with earlier research.
Looking at various statistical scenarios, the researchers found that the 50-and-older group, which included a segment already saving near or at the annual limit, raised its dollar contributions by 3.5 percent from 2002 to 2005, about half the 6.8 percentage-point-higher ceiling these workers were allowed for contributions. As no surprise, the highest contributors to 401(k) plans have the highest salaries, around $163,000 a year, compared with $57,000 for the full sample, the data showed.
“These results imply that for every 1-percentage-point increase in the tax-deferred limit, maximum contributors will increase their contributions by nearly one-half a percentage point,” the CRR researchers wrote. “While this group does not increase their contributions all the way up to the new limit, they appear to be quite sensitive to tax incentives” to boost 401(k) savings, the report continued.
The report notes that the CRR analysis does not take into account the extent to which the increase in 401(k) contributions among maximum earners represented an increase in their total saving. It’s possible that these individuals merely shifted their planned savings from a non-tax-advantaged account into their 401(k)s, the researchers said.
They concluded that “further tinkering with the contribution limit for 401(k)s would likely affect only a very small group of people,” and does not offer a broad cure for low U.S. retirement savings in general.
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