When it was adopted by Congress, "catch-up" seemed like a surefire attraction for older workers.
The idea is to give 401(k) plan participants 50 or older the opportunity to stash away some extra tax-deferred bucks toward their retirement.
But the notion so far has been a slow sell for both plan sponsors and participants.
Under the $1.35 trillion 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA), the contribution limits for 401(k) plans are incrementally raised from $11,500 in 2002 to $15,000 in 2006. And older workers in companies that adopt the catch-up provisions of the act can contribute incrementally more - $1,000 more in 2002 and up to $5,000 more in 2006.
"Most everyone has [accepted] the higher limits," said David Wray, president of the Profit Sharing/401(k) Council of America in Chicago, "but catch-up hasn't been implemented as quickly because of its complexity."
It's expected EGTRRA will have a significant impact on 401(k) assets during this decade. "I would expect there to be an increase in assets as a result of the catch-up contribution, as well as the expansion of the allowable contribution rates," noted Rich Koski, a principal with Buck Consultants, a global human resources consulting firm in New York. Such increases will add $220 billion to plan assets from 2002 to 2011, according to Cerulli Associates of Boston. But that number, which is based on plan participation rates of 75% to 80%, may be high. Those rates are on a downward trend, according to Buck Consultants, dropping to 73% in 2001, the lowest since 1991 (see MFMN 3/31/03).
One company that's seen a good response by older workers to catch-up is Fidelity Investments, Boston. It has reported that 56% of employees 50 years old or older in 26,000 of the plans it administers have taken advantage of catch-up. That's an impressive number, according to Wray. "I think 36% would be a very good utilization rate," he asserted. "That would be a big additional contribution into the system."
Fidelity's experience appears to be the exception. Other plan administrators like T. Rowe Price, of Baltimore, and Vanguard Group, of Valley Forge, Pa., are finding only 5% to 6% of eligible older workers in their plans taking advantage of catch-up.
Fidelity's plan sponsors have also been quicker to embrace EGTRRA than employers in general. The company reported that 93% of its sponsors have enabled catch-up, while industry wide participation is in the 50% range. "As a provider, Fidelity is ahead of the curve," both from a systems and a marketing perspective, said Cerulli Associate Director Joshua Dietch. "If the service provider has a campaign, and the onus is not on the plan sponsors to make the first step, you're going to have a much higher utilization," Wray reasoned.
However, some plan sponsors have gone the extra mile to get the word out to their workers with good results. For example, Bank One, Chicago, which launched its catch-up program in June 2002, attracted into it 1,300 of some 12,000 older workers.
While there may be 12,000 workers eligible for catch-up, only 4,000 typically make the maximum contribution to a company's 401(k) plan, said Bank One Manager of Retirement Plans Donald Hoy. Since a participant has to max out their contribution before taking advantage of catch-up, only those 30%, realistically, had the wherewithal to participate in the program, and of that group, only 32% took advantage of it, he observed.
Wray emphasized that catch-up is still in its infancy. The verdict on the popularity of catch-up probably won't be known until the end of this year because a lot of companies didn't adopt catch-up until late in 2002, Koski explained.
As word about catch-up gets out to workers, it is believed that it will gather momentum at least among plan participants making the maximum contribution to their plans.
One way to get that word out, according to Rep. John Boehner (R-Ohio), is to let plan sponsors give investment advice to their participants, and he's filed a bill to do that. A similar measure cleared the House last year but languished in the Senate.
Advice could offer a way for people to manage themselves out of what could be a deficit in funding for their retirement, Dietch said. "But I don't think that catch-up provisions will be a success or failure simply because a plan provider can provide advice," he added.
Moreover, some plans are already offering advice to participants. According to Wray, 41% of the 1,200 companies in his organization do so. "Companies are going ahead and putting advice in even without legislation," he observed.
While it may now appear that, for the most part, older workers aren't catching on to catch-up, in the long run, that is bound to change, according to Wray.
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