password file for crypt authentication fails

Goal:
create a passwd.txt file using pg_passwd and use it with "crypt" authentication to override the pg_shadow password of some users in accessing a specific database

Method:
1. add this entry to pg_hba.conf
host specific_DB xxx.xxx.xxx.xxx yyy.yyy.yyy.yyy crypt passwd.txt
2. connect with remote client as:
psql -h hostname -U username specific_DB

Result:
if I try this with auth method "crypt", it fails and when I say fails I mean it uses the default password found in pg_shadow instead of the one in passwd.txt
But if I use as auth method "password", it works fine i.e. overrides the pg_shadow password and uses the one found in passwd.txt

The manual says:
" To restrict the set of users that are allowed to connect to certain databases, list the set of users in a separate file (one user name per line) in the same directory that pg_hba.conf is in, and mention the (base) name of the file after the password or crypt keyword, respectively, in pg_hba.conf."

Any ideas what I'm doing wrong?

TIA,
thalis