Expanded 401(k) may not help many workers

By Christine Dugas, USA TODAY

Despite the promise of higher 401(k) plan contribution limits in a bill that passed the House on Wednesday, few workers may actually be able to take advantage of them, experts say.

Currently, the maximum annual contribution to a 401(k) plan is $10,500. Under the House bill, that would rise to $15,000.

The bill also contains a provision to help older workers catch up on their retirement savings. It allows workers 50 and older to contribute up to $20,000 a year.

But there's a catch: Those who could most afford to add to their retirement plans — highly paid workers — are likely to be restricted to much smaller contributions based on the contribution rate of their lower-paid co-workers.

And lower-paid workers, who would be allowed to make the maximum contribution, may not be able to afford to increase the amount they save.

Although critics of the House bill say it primarily benefits high-income workers, that's not true in all cases.

In most 401(k) plans, workers who earn $85,000 or more are subject to a non-discrimination test that links their contributions to the average contribution of lower-paid workers.

The rules say the difference between the two contribution rates can't be more than 2%.

So if workers earning less than $85,000 on average contribute 4% of their salaries to the plan, highly paid workers can contribute up to 6%.

At most plans, highly paid workers are able to contribute 7% of their salary, according to the Profit Sharing/401(k) Council of America. That means a worker earning $85,000 would be able to contribute $5,950 a year.

Workers would have to earn more than $200,000 to be able to contribute the maximum $15,000.

The purpose of the non-discrimination test is not to punish high-income workers but to prompt employers to do more to encourage the rank and file to participate in a 401(k) plan. [Give me a break.]

"Pressure from upper management may lead to better education and more generous matching contributions from employers," says James Delaplane, vice president of the American Benefits Council.

"The non-discrimination test certainly has worked to encourage education programs and other incentives, which in turn have resulted in participation by some workers who otherwise wouldn't have participated," says Karen Ferguson, director of the Pension Rights Center.

"But to the extent that there are an enormous number of workers who can't afford to participate, the test doesn't solve the real problem."

And higher limits are unlikely to encourage many middle-income workers to save more, consumer advocates say. Under the current law, less than 5% of 401(k) plan participants contribute the maximum, according to the Center on Budget and Policy Priorities.

Contributing: William M. Welch