Retirement Plans Turn Creative to Help Curb Student Loan Debt
by Murray Coleman - Tuesday, 18 February, 2020
Americans are facing a wave of debt tied to trying to better their lives through education. An estimated 44.7 million people had outstanding federal student loans totaling $1.47 trillion at the end of 2018, according to the Federal Reserve Bank of New York.
That was more than credit cards or auto loans. At current growth rates, some experts are predicting that total outstanding student loan debt in the U.S. will top $2 trillion by 2024.1
But some sponsors of 401(k) plans and similar workplace retirement savings programs are trying to help. As a result, a few possible options have emerged in recent years to help employees pay off their student loan debt while continuing to build a nest egg over a lifetime.
Matching Loan Contributions
After a so-called private letter ruling from the IRS in 2018 – one that provided additional guidance on how retirement platforms could help employees defray their student loan costs --Abbott Laboratories decided to forge ahead with its Freedom 2 Save Plan.
Considered a pioneering program in terms of melding retirement plan resources and employee savings, Abbott's approach is fairly straightforward.2 Simply put, participants who devote 2% of their annual salaries to pay off student debt will receive a contribution to their 401(k) accounts. That contribution represents 5% of the employee's salary.
The program also includes incentives for retirement savings. For plan participants who keep contributing 2% of their annual salaries to paying down student loans, the company contributes a 5% salary match to that person's 401(k) account. And that's whether such an employee contributes to his or her savings plan or not.
Taking Action on Student Loans
Abbott isn't alone in trying to close the gap in student loan debt. In 2020, Travelers Cos. began a program in which it will contribute to retirement accounts up to 5% of an employee's annual salary -- if, that is, such a participant also makes student loan debt payments. Like at Abbott, participants don't have to contribute to their retirement savings plan to qualify for 401(k) matches by Travelers.
Others are reportedly doing much the same in terms of introducing new student loan repayment programs that work together with existing 401(k) platforms. Those include Raytheon Co. and Unum Group.3
Indeed, a 2018 nationwide survey of U.S. employers by the Employee Benefit Research Institute (EBRI) found that 54% currently offer financial wellness initiatives. Another third of respondents indicated an "interest" in creating such programs.4
Alternative Strategies
Some plan sponsors are choosing to take a more direct route. In these programs, employers will agree to make payments to pay off a student loan for a plan participant covering a predetermined period.
Of course, this type of a benefit can lead to creation of an entirely different budgeting process. It also should be noted that such payments might wind up being viewed by the IRS as taxable events for employees.
Another alternative program some plan sponsors are undertaking is to trade pay related to vacation or other types of personal time-off for student loan payments.
The most popular way to tackle rising student loan debt on the part of employers, according to the EBRI survey, is by developing new educational programs for plan participants to understand the harmful long-term problems presented by letting such debt build.
In partnership with a plan advisor or other financial services veteran, a number of trade publications report that plan sponsors are increasingly working to create online and in-person consumer training for employees.
Do Your Homework
No matter what type of benefit options or educational programs plan sponsors might consider implementing, industry experts caution employers that a proper amount of due diligence is required.
In general, they suggest that any expansion of employee benefits in a defined contribution plan should include discussions with a qualified legal counsel as well as appropriate investment fiduciaries and plan administrators.
Industry analysts at Willis Towers Watson recommend that plan sponsors need to rigorously review any potential impact to a plan's total cost structure. Another possible point-of-contention they point to: seamless integration of benefits in a way that doesn't jeopardize a plan's safe harbor status.5
At Index Fund Advisors, our team includes experienced professionals in areas such as financial and tax planning. Given that IFA's advisors also work with clients across many different industries and working in all types of businesses, it's not uncommon for our wealth managers to be asked about how best to deal with student loan debt. For those interested in exploring different ways to pay down their debt, of course, a company's benefits administration staff is going to be a primary place to start searching for different options.
Wealth advisors at IFA, however, might be another possible source to gather information on how best to approach issues related to student loans. Although we're not likely to know what each worker's plan sponsor is providing in terms of payment options, our advisors do encourage a broader conversation about how loans in general fit into each person's individual and comprehensive financial plan, which is offered to every IFA client on a complimentary basis.
Footnotes:
- Mark Kantrowitz, "Trends in Student Loan Debt," Journal of Financial Planning, February 2019.
- Pensions & Investments, "For those with student debt, her program was an industry first," Nov. 11, 2019.
- Pensions & Investments, "Sponsors continuing on path to alleviate big financial burdens," Jan. 13, 2020.
- Employee Benefit Research Institute, "Financial Wellbeing Employer Survey," Nov. 29, 2018.
- Willis Towers Watson, "IRS approves student loan ‘match' for 401(k) plan," Sept. 27, 2018.
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