12 November 2018

Few Boomers Take Advantage of 401(k) Catch-Up Provisions

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According to research by Fidelity Investments, only 13 percent of baby boomers are taking advantage of the “catch-up” contributions to their retirement accounts.  Catch-up contributions are allowed by the IRS for anyone over 50 where an additional $5,500 in salary deferrals can be made into a 401(k) plan.

Unfortunately, this finding is not a surprise. Other research has estimated that only about 10 percent of all workers overall are contributing the maximum $17,500 per year that everyone, regardless of age, is allowed to contribute under IRS guidelines.  Since most workers do not contribute the maximum, the “catch-up” 401(k) contribution established to encourage people to save more when they are over 50 is largely irrelevant to them.

The low utilization of the catch-up contribution is indicative of the larger issue that most Americans are simply not saving enough for retirement. Research shows that the typical older household enrolled in a 401(k) plan at work has saved about only about $120,000.  Low account balances such as this are not likely to be enough to pay medical expenses in excess of what Medicare will cover.   Despite having too little money saved and prospects for a long life, apparently very few people are feeling any urgency to save more.

The few who are taking advantage of the catch-up provision are concentrated in higher-income households. And those taking advantage of the catch-up are contributing a high percentage of their salaries: 21 percent of men’s earnings, on average, and 23 percent of women’s earnings. These figures do not include any employer matching amounts that may be available.

Continued educational outreach to 401(k) plan participants is critical in helping them prepare for retirement. Understanding post-retirement income needs can help workers plan ahead and budget to save more now, so that they are not facing significant challenges at retirement.

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