Most Participants Don’t Even Touch the Limit

A paper explores whether higher limits on 401(k) plan contributions encourage people to save more.

Perhaps people are being reined in from saving as much as they’d like by the current contribution limits on 401(k) plans, if they are even aware of the limits in the first place. “Do Catch-Up Contributions Increase 401(k) Saving?,” from the Center for Retirement Research at Boston College, seeks to explore savings behaviors and how many retirement plan participants in 401(k) plans actually save the maximum amount allowed.

Using the U.S. Census Bureau’s Survey of Income and Program Participation, the researchers explored whether raising 401(k) contribution limits would encourage Americans to save more for retirement. Their analysis scrutinized the effects of the 2001 increase in contribution limits and the introduction of catch-up contributions for those over the age of 50. Current limits are $18,000 and $6,000 for the catch-up contributions. 

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Their research found that plan participants under age 50 contributing the maximum increased their contribution by an average of 7%, while those eligible to make catch-up contributions increased their contributions by an average of 14%. 

The numbers suggest it is mostly workers around age 50 who are constrained by the maximum contribution limits, the study pointed out. When permitted to increase contributions by an additional 6.8% starting in 2002, workers age 50 and over increased savings by 3.5%.

The researchers conclude that since only about 10% of participants overall are constrained by the contribution limits, raising the limits would not offer a widespread answer to low savings rates for most retirement plan participants.

“Do Catch-Up Contributions Increase 401(k) Saving?” was written by Qi Guan, Matthew S. Rutledge and Francis M. Vitagliano of the Center for Retirement Research at Boston College, and by April Yanyuan Wu, a researcher at Mathematica Policy Research, a policy research organization.

A link to download the paper is here.

S&P 1500 Pension Deficit Decreased in June

S&P 1500 pension funded status has improved by 10 percentage points since the end of January 2015.

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies improved by 1% to 84% as of June 30, according to Mercer.

The estimated aggregate deficit of $346 billion as of June 30 improved by $35 billion from the end of May. Funded status is now up by $158 billion from the $504 billion deficit measured at the end of 2014.

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Increases in interest rates used to calculate corporate pension plan liabilities made up for poor equity market performance, Mercer said. The S&P 500 index lost 2.1% in June while the MSCI EAFE index lost 3.0%. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by 29 basis points to 4.28%.

Daily funded status volatility was higher than normal in June, largely due to uncertainty surrounding the Greek debt crisis. This mitigated what could have been a larger improvement in funded status for the month.

“Just looking at stock market performance, we might have expected pension funded status to decline”, says Matt McDaniel, a partner in Mercer’s retirement business. “But discount rates continue to rise. We now have the highest discount rates we’ve seen since late 2013. Sponsors who were putting off derisking ‘until rates rise’ may now want to consider activating their risk management plans.”

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