The reason has to do with behavioral finance, he said. When saving for retirement with pretax money, it feels like someone else is paying for it. Take away that benefit, and saving becomes less appealing.
“You’ll get a huge tax benefit when you retire, but it won’t feel the same way,” Edwards said.
The fact that only certain individuals have access to these retirement plans is unfair, Edwards said. A more beneficial change for legislators to consider would be opening up the Thrift Savings Plan, available to federal workers, for everyone, he said.
Scott Hanson, co-founder and senior partner at Hanson McClain Advisors in Sacramento, California, said the rumored changes could discourage people from saving for retirement when most already are not saving enough.
“What I wish was part of this discussion is separating retirement savings from the employer,” which could provide more options for investors, Hanson said.
If the changes do go through, investors will need to maintain the momentum and amount they are saving for retirement, said Geri Eisenman Pell, CEO of Pell Wealth Partners.
“We can’t have people take their eye off the ball in terms of saving for retirement,” Eisenman Pell said. “That does not mean to stop saving for retirement. It means to save differently.”
Investors could diversify with investments such as Roth IRAs, regular IRAs and life insurance policies, she said. They may also look to annuities because, like 401(k)s, the money invested in them is often tax-deferred and can be automated, she said.