Higher Limits, Catch-ups Directly Benefit Few: GAO Report

September 24, 2001 (PLANSPONSOR.com) ? Only about 8% of all defined contribution plan participants will benefit from expanded and enhanced contribution limits. And just 11% of eligible DC participants are likely to benefit directly from the so-called catch-up contribution provisions in the new tax law, according to a report from the General Accounting Office (GAO).

Higher earners were more likely than low and moderate earners, and men were more likely than women, to benefit directly from such an increase, according to the Report on Private Pensions: Issues of Coverage and Increasing Contribution Limits for Defined Contribution Plans, a report commissioned by Representative William Coyne (D-Pennsylvania) of the House Ways and Means Committee.

Trickle Down?

The report concedes that lower-income workers could benefit if employers found the raised limits attractive enough to add and/or enhance coverage in existing plans but acknowledged that the real impact would be impossible to determine.

The GAO found that increasing the percentage limit on combined employer and employee contributions accounts for half of the 3.1 million likely direct beneficiaries of an increase in all three contribution limits.

Roughly 721,000 DC participants, or 11% of those eligible, would likely benefit from the new catch-up contributions designed to allow participants over age 50 to set aside extra funds for retirement. The report noted that here, too, higher earners were more likely to benefit from the option.

Participation Rated

The GAO report found that in 1998, 47% of all workers participated in a pension plan and 36% of all workers participated in a defined contribution plan. More than half (57%) of pension plan participants had low or moderate earnings (less than $40,000 per year) and were men (56%).

The report noted that low/moderate income workers were much less likely to participate in a pension plan. Just 38% of workers who earned less than $40,000 per year participated in a pension plan, compared with 70% of those who earned between $40,000 and $75,000/year.

According to the GAO, while half of all male workers participated in a pension plan, just 44% of all female workers did. The report noted several likely factors explaining that disparity, including women workers’:

  • lower wages
  • greater concentration in part-time jobs, and
  • greater concentration in industries where few employers offer pension plans.

Lower income workers were better represented in the DC arena. While about 38.9 million workers, or 36% of all workers, participated in DC plans, over half (54%) had annual incomes of less than $40,000. Fifty-seven percent of DC participants were men.

The full report is at http://www.gao.gov/new.items/d01846.pdf