Catch-Up Contributions Catching On – with Highly Compensated

June 2, 2005 ( - The vast majority of 401(k) participants now have the ability to "catch up" on their retirement savings, but few are taking advantage, according to a new report.

In “Catch-Up Contributions in 2004: Plan Sponsor and Participant Adoption,” the Vanguard Group claims that 97% of the nearly 1.2 million participants in 1,228 plans studied had the ability to make so-called “catch-up” contributions, but just 13% of those eligible took advantage of the feature in 2004. On average, eligible participants who took advantage saved an additional $2,207 out of a maximum allowable catch-up contribution of $3,000, according to the report.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) permitted workers age 50 and older to contribute additional amounts to their defined contribution accounts above and beyond the regular 402(g) limits on annual pre-tax deferrals ($14,000 in 2005, $13,000 in 2004).

All of the plans with more than 5,000 participants surveyed by Vanguard allowed participants to make the catch-up contributions, compared with just 82% of those with fewer than 1,000 participants (86% did so overall). Plans in the service sector – including finance, real estate, insurance, education, healthcare, and business – were generally more likely to provide the option than firms in the goods-producing sector.

Vanguard noted two major determinative trends affecting whether workers took advantage of the option. The first, not surprisingly, was the size of the account balance, which Vanguard noted could be seen as a likely proxy for wealth. Catch-up contributors had “dramatically higher” account balances, according to Vanguard – nearly three times as large as other participants. As it relates to income, the average adoption rate for households with incomes $50,000 and greater was three times the rate of other households. Vanguard estimated that approximately 60% of the participants making catch-up contributions were considered highly compensated employees under IRS definitions. Still, only 18% of those higher income workers were taking advantage of the option.

The other major determinative factor appeared to be Web registration, which Vanguard interpreted as a proxy for investor sophistication and level of motivation. More than two-thirds (69%) of those participants making catch-up contributions were signed up for Web access versus just 41% among non-contributors. This group also appeared to include a higher proportion of male participants, though Vanguard said that, adjusting for other factors “age, job tenure, and gender do not have any meaningful effects on catch-up status.”

Perhaps more significantly, Vanguard also said that even among plans offering the option for catch-up contributions, “the overwhelming majority” are saving below the 402(g) limit.

The report is here .