It’s increasingly difficult to ignore the growing burden student loans have placed on employees these days. Debt is not only stressful, but surveys indicate individuals with substantial student loans aren’t saving as much for retirement (if anything at all). One may assume young employees with student loans have a long savings horizon to catch-up after paying off their debt but with the rising cost of medical expenses and shrinking pool for social security, saving early and sufficiently for retirement has become imperative. Nevertheless, how do you encourage a recent college graduate with $80,000+ in student loans at 6% interest to start saving for a retirement that feels a lifetime away? Furthermore, what is the most effective way for employers to help employees save for retirement – contribute more to employee 401(k)s or assist them in paying down student loan debt? It’s a conundrum more and more Plan Sponsors and benefits teams face today, leading to integrated discussions incorporating both student loans and retirement savings. It’s hard to decouple the effect student loans have on an employee’s overall financial wellness, a growing focus of defined contribution Plan Sponsors.
To assist employees, many companies offer student loan repayment programs in hopes that employees pay down loans faster and start saving sooner. Employers do this by offering monetary contributions towards employee’s student debt repayment. These programs also serve as effective recruiting and retention tools for younger hires. Unfortunately, employer student loan contributions and retirement plan contributions are independent of one another; in other words, employers cannot redirect company 401(k) contributions towards an employee’s student loans. To contribute to student loans, employers must roll out a separate, taxable benefit program. The benefit can be customized in a variety of ways depending on the philosophy and generosity of the organization. Structures vary from offering recurring year-end lump sum contributions, matching an employee’s contribution dollar for dollar to a certain annual maximum or creating a selective scholarship program awarding larger contributions. While all share the noble goal of helping employees diminish their student debt, there are several factors to consider before rolling out one of these programs.
First, these programs are an additional, taxable expense for the company. Is your company able and willing to take on the additional expense? Contributions are also taxable for employees so it is important to educate employees upfront that their taxable income will increase. Second, contributing to student loans may help employees pay off debt faster but it doesn’t address saving. Younger, less highly compensated employees with student debt may begin their career choosing to pay down loans instead of contributing to a retirement plan. Not only are these employees not contributing to retirement, but they’re leaving employer match dollars – free savings – on the table. Since we know 401(k) assets are largely driven by inertia, influencing these employees to eventually participate in the plan and increase their deferrals may prove difficult. To combat this concern, offering a financial wellness program aims to educate employees on debt management and savings. Other plan design features more directly drive results. For example, the addition of annual re-enrollment for participants saving below a certain deferral threshold or automatic deferral increase will likely improve retirement savings quicker.
We also expect to see newer, unique benefit solutions available in the near future. For example, one benefits platform is developing a service where companies can reward employees making student loan payments by making corresponding pre-tax contributions into the retirement plan. This tremendous benefit thus allows these employees the opportunity to contribute and grow their retirement plans. With more attention on student loans and overall financial wellness, more hybrid loan contribution/401(k) contribution programs are likely to emerge.
There are also several pieces of outstanding legislation in Washington that propose structuring employer student loan contributions as a tax-exempt benefit. This legislation is likely to drive further changes to benefit landscape and intersection of 401(k) and student loan programs.
Please contact any of the professionals at DiMeo Schneider & Associates, L.L.C. for more information about student loan integration and other financial wellness programs.
