The dust hasn’t yet settled, but a few things about the new tax law seem clear. Employees may have noticed a difference in their paychecks, and some projections put the average worker’s additional spendable income at about $2,000 per year.
What they will do with that income remains to be seen. While many will be tempted to improve their standard of living through purchases, you may be able to encourage them to take a longer view. As the increase in take-home pay is beginning to kick in, now could be the perfect time to point out reasons to increase retirement savings. Better yet, it might be the right time to amend the plan to allow for automatic increases in deferral amounts.
Adding financial education sessions
An ongoing program of education about the retirement plan is key to helping employees make good choices to benefit their futures. But as the first significant change in the income tax law in nearly four decades takes effect, adding an extra employee educational session with your plan’s financial advisor could be a smart move.
Along with the discussion of increasing contributions and effective investment strategies, this could be a good time to discuss the relative advantages of pre-tax versus Roth contributions — if your plan offers a choice. With employees enjoying lower tax rates in 2018, they might benefit more from contributing to a Roth account in the 401(k) plan. In fact, because the new tax rates for individuals are set to expire in eight years, now may be a good time for them to build their Roth account without worrying so much about the tax consequences. If the tax rates revert later, employees can resume saving in their traditional pre-tax accounts.
Illustrating the potential impact of increased retirement savings requires several assumptions which, of course, should be thoroughly explained to employees. Even with the fine print, illustrations like the one here could encourage employees to save more for the future — without feeling a pinch in their wallets.
- Increased take-home pay: $100 per month, saved in the 401(k) plan
- Average investment earnings: 8%
- Current age: 40
- Retirement age: 65
- Additional savings in the 401(k) plan: $91,484
For illustrative purposes only. Assumes 8% average annual rate of return, compounded annually and is not based on any specific investment or savings strategy.
Of course, the tax savings projected by experts and laypersons alike are only projections, and how the new laws play out could be different. Only time will tell. But the bottom line for plan sponsors is this: Take every reasonable opportunity to remind employees about the reasons to save. Educate them about the opportunity they already have to save for the future. When you have a chance — like this one — to add even more reasons to save, by all means, do so. That little bit of encouragement could make a big difference for your employees.
This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.
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