The House Ways and Means Committee in H.R 2954 handed the Securing a Strong Retirement Act (SECURE Act 2.0) on May 5, 2021, which is presently awaiting additional approval in Congress. It offers employers the choice to match their workers’ student loan funds to a lender, holding the loan with the employer’s contributions to an outlined contribution plan below IRC §401(m). The proposal contains the motivation to undertake such a provision with a regulatory safe-harbor that gives exemption from “non-discrimination testing” necessities.
For the sake of this dialogue, we’ll confer with such potential employer matching contributions as Student Loan Matches or SLiMs©. Whether the SECURE Act 2.0 turns into new legislation or not, debates over student loans and the way they need to be addressed have been a recurring theme in proposed laws over the previous years (e.g. the proposed Heroes Act–H.R. 6800 in May 2020) that’s more likely to proceed till reduction is offered. In June 2021, Senators Ben Cardin and Rob Portman launched an analogous SLiM provision in S. 1770, which the Senate has but to overview.
This leaves employers with three questions:
- Is student loan debt an issue?
- How might a SLiM to an outlined contribution plan mitigate the issue for the members of an employer’s workforce who’ve student loans?
- If a SLiM turns into a statutory choice for an employer to undertake, is it value contemplating?
This article offers background data for every of those questions and pertinent concerns within the quest for solutions.
Is student loan debt an issue?
As of 2021, 45 million people within the U.S. carry student loan money owed equal to a complete of $1.7 billion, surpassing auto loans and credit card debt, and second solely to mortgages. The common loan carried by a student graduating in 2021 is $37,693, a rise of 15% from 2020.1 The debt load is a multi-generational actuality. CNBC revealed a report in December 2020 that gives the next knowledge.2
Percent of whole student debt by age group
Why are legislators addressing student loans as a priority within the context of retirement safety?
Financial volatility ranks third within the high present dangers, in line with a January 2021 survey by the Society of Actuaries.3 The key to saving for adequate retirement revenue is to start out saving early in life and save persistently to learn from compounding progress of long-term investments. This is changing into more and more tough for staff to realize.4 Student loan debt significantly compromises how dedicated persons are to creating that occur as a result of so long as staff have any debt, they have a tendency to not save for retirement. Just the “mere presence of debt weighs on people,” says Geoff Sanzenbacher, affiliate analysis director for the Center for Retirement Research at Boston College. “They don’t save much no matter how much debt they have. That is a little bit surprising.”5 If student loans are preserving tens of millions of people from saving for retirement, they’re a risk to retirement safety. And that could be a drawback.
How might a SLiM tackle the issue?
SLiMs don’t scale back the burden of student loans, however they scale back the unfavorable side-effects for people. Instead of suspending all financial savings for retirement till after student loans are paid off, it makes it potential for retirement financial savings to start out as quickly as an worker is eligible to take part in a plan.
SLiMs don’t scale back the burden of student loans, however they scale back the unfavorable side-effects for people.
To higher seize the potential ramifications, allow us to take into account an instance for a selected graduate who begins a job for an employer with a certified financial savings plan. We will make the next assumptions:
- Starting wage at age 22 of $50,0006
- 2% annual wage will increase
- 3% employer match
- 15-year loan fee length
- 3% worker contribution after loan paid off
- 5% funding return for all years
This situation is summarized within the graph under.
Growth of SLiMs made earlier than worker match
With the person by no means contributing greater than the three% wanted to obtain the employer match portion, the proportion of financial savings at retirement which might be attributable to the employer contributions whereas student loans are being paid off (in gentle blue) accounts for almost one third of ultimate financial savings at retirement. If the person had been to contribute at a better charge, that remaining proportion could be decrease. However, this instance demonstrates that even comparatively small contributions within the early years of a working lifetime can have a big effect on retirement readiness when that point comes.
If it turns into an choice, is that this profit value implementing?
To reply this query, we have to ask just a few extra. Who are the workers? How important is a secondary training diploma to the employer for delivering services? What proportion of the worker inhabitants has student loans? What is the essential mass of workers with student loans to make adopting a SLiM worthwhile? If it’s deemed to be a precious profit, what are some administrative challenges? How may one overcome these challenges?
First, an employer wants to judge the worker inhabitants to find out how useful the non-traditional employer matching contributions is perhaps. What proportion of the worker inhabitants is school educated or has different superior levels? Using a prudently crafted nameless survey (in order to not violate privateness legal guidelines), an employer could need to survey staff to find out what p.c are carrying school loans and roughly how a lot. The outcomes of such a survey can then be weighed within the steadiness of execs and cons. What proportion of workers with student loans is fascinating for non-traditional employer matching contributions to be definitely worth the implementation? 10%? 40%? 70%? There isn’t any right reply, simply the perfect reply for a selected employer and the workers.
Second, whether it is decided to be the perfect resolution, what are the executive duties and inner governance wanted to have an effect on adoption of a SLiM? Initially, there could be a necessity for a proper financial savings plan modification. Next, a mechanism (ideally automated) must be put in place for confirming that the loan holder obtained a student loan fee earlier than the employer would make the SLiM. The loan holder’s frequency of such attestation would additionally have to be thought of.
Coordinating such efforts with the employer’s payroll supplier may turn out to be an choice. Senator Lamar Alexander within the Student Loan Repayment and FAFSA Simplification Act S. 4247 on July 21, 2020 proposed making student loan funds immediately out of payroll. It would behoove the employer to arrange loan fee verification in a fashion that features a secondary affirmation to keep away from any fraudulent claims of a loan being paid.
Another choice could be to make employer contributions yearly, based mostly on an finish of 12 months affirmation of whole student loan funds plus any wage deferrals made on to the plan. Companies might probably match on wage deferrals all year long and carry out an annual true-up of match when additionally contemplating student loan funds based mostly on an finish of 12 months affirmation of whole student loan funds. While a one-time, end-of-year affirmation could be simpler to handle, it would create a lack of funding revenue on new contributions as for a true-up of match.
Conclusion
Employee advantages are a essential factor of how employers outline themselves and set them selves aside from different employers for attracting expertise and retaining skilled workers. Younger staff place a better worth on employer advantages than earlier generations did; they’ve been proven to worth them much more than wage therapy. In truth, student loan reimbursement advantages rank third amongst their most desired advantages.7
If employers take into account the worth they place on supporting youthful workers to realize retirement readiness, and assess the executive challenges that may include non-traditional employer matching retirement contributions, they are going to be prepared for alternatives to handle the wants of their workers. Is an answer for enhancing retirement safety definitely worth the potential administrative challenges of implementation? Employers can be confronted with such a choice if SLiMs turn out to be a part of retirement legislation.
1Zach Friedman. (February 20, 2021). Student Loan Debt Statistics in 2021: A file $1.7 Trillion. Forbes.
2Megan DeMatteo. (December 12, 2020). Here’s the typical student loan debt by age. CNBC.
3Max J. Rudolph. (January 2021). 14th Annual Survey of Emerging Risks. Society of Actuaries.
4Paula Aven Gladych. (July 12, 2018). Do younger adults with student loan debt save much less for retirement? EBN BenefitInformation.com.
5Dan Doonan and Tyler Bond. (September 2020). The Growing Burden of Retirement: Rising Costs and More Risk Increase Uncertainty. National Institute on Retirement Security.
6Average for school graduates based mostly on Summer 2020 Salary Survey. National Association of Colleges and Employers.
7Stephen Miller. (June 5, 2019). Younger Workers Put Student Loan Aid Near Top of Desired Benefits. Certified Employee Benefit Specialist.