Easier ‘Adulting’ Through Plan Design

Helping employees with student loans should be part of a strategic plan design conversation.

Article originally published in ASPPA's Plan Consultant.

Kallback, B. & Pinnola, E. (2018). Easier adulting through plan design. Plan Consultant, Fall 2018, 74-75.

It’s being called a crisis. It’s being used as a reason for delaying home ownership, saving for retirement, purchasing life insurance, starting a family, donating to charities, and other ‘adulting’ activities. While the impact is already present in the lives of the Millennials and Generation Y, we’re seeing many middle-age to near-retirees still struggling with this issue.

Student loans are impacting the lives of our plan participants.

We have met with thousands of plan participants, colleagues, and community members concerning their retirement savings plans. We’ve ‘got stuck’ in conversations at dinner parties, BBQs, and kid’s sporting events about how to save for retirement when student loans are such a large portion of monthly paychecks.

In a panel discussion hosted by CommonBond, student debt was described as “pervasive and damaging” and, “for workers aged 22 to 34, student debt significantly outranks retirement as the top financial concern” (Manganaro, 2018).

According to the Federal Reserve, “Americans owe $1.5 trillion in student loan debt.” This level exceeds “auto loan debt ($1.1 trillion) and credit card debt ($977 billion)” (Lobosco, 2018).

We’ve heard some in the qualified plan industry say this is a participant issue. That people should know they can save for retirement while paying down student loan debt. For many people, the numbers will allow it. Logic says it can happen. Yet, this is oftentimes not a logical issue. Debt, for many people, is an emotional burden that weighs down motivation and the ability to think clearly. Participants are not involved daily in the retirement industry (as we are). Many do not prioritize as we in the retirement industry (hopefully) do. Therefore, it can be difficult for us to empathize when someone tells us they can’t contribute to their retirement plan because they are focusing on student loan debt.

There is also a generational divide occurring. Many plan sponsors and members of leadership teams did not come of age when student loans were an issue. Many of these leaders paid for higher education through summer jobs or working part-time. Thus, ownership and decision-makers struggle to empathize to the reality of what the Millennials and Generation Y experience.

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Student loans are more than a participant education issue. They are a strategic plan design conversation that can lead to effective participant outcomes. Many employers express a desire to serve participants through a well-designed plan. As the student loan crisis deepens, this plan design conversation should include consideration of student loan debt. According to the Society for Human Resource Management, only 3 percent of employers currently offer an employer benefit aimed at paying down the student loan debt of their employees (Manganaro, 2018).

For many years, employers have offered tuition reimbursement programs. When included within the employee benefit program, employees can further their education with up to $5,250 in tax-free reimbursement while employers can deduct up to the amount reimbursed in annual employee tuition payments.

Yet, the depth of student loan debt decreases the allure tuition reimbursement may have held in the past. Future education is often deprioritized until present education debt can be eliminated. There is disconnect between what employers view as valued benefits versus what employees want to see. Yet employees across all age groups and industries with student loan debt consistently rank student loan repayment support ahead of tuition reimbursement and financial planning as a preferred benefit (Manganaro, 2018).

• 76% of respondents to a survey from American Student Assistance agreed that, all other things being equal, their choice to take a job would be considerably affected or decided based upon an employer's willingness to offer a student loan repayment program.

• 80% of respondents to an IonTuition survey said they would like to work for a company that offers student loan repayment assistance.

• In addition, about 50% of the respondents to the same IonTuition survey said they’d prefer the help with their student loans over 401(k) contributions.

• Almost 40% of respondents to a Student Loan Hero survey said that it is either "extremely" or "very" important that a job offer includes student loan repayment assistance as a benefit. An additional 23.5% considered it "moderately important" (Greenfield, 2016).

Unfortunately, there has not been one way established to begin a student loan repayment program. With the plan design just beginning to get consideration, there is no standard, compliance-friendly, best practice method. In general, an employer will agree to pay a specified amount toward an employee’s student loan debt. Some companies may directly pay these loans, while others will reimburse for these expenses.

Gradifi, a “wholly owned subsidiary of First Republic Bank,” allows a platform for employers to “provide a benefit that may reduce employee student loan stress and recruit and retain good employees.” The company partners with “over 130 companies for their SLP Planä (Student Loan Paydown) which enables employers to make direct contributions to their employees’ student loans” (Business Wire, 2017).

For instance, Pricewaterhouse Coopers, through its partnership with Gradifi, instituted an annual payment system where employees can receive up to $1,200 per year for a total of six years. Natixis Global Access Management pays “employees who have been with the company for five years a lump sum of $5,000 with additional $1,000 payments on every work anniversary up to five more years” (Lanza, 2016).

Many TPAS and recordkeepers are concerned about employees’ focusing too much fire on student loan debt versus retirement savings, thus innovative methods are being developed to balance the short and long term. In March 2016, Prudential Retirement partnered with Student Loan Genius, enabling clients of the recordkeeper to offer pre-tax contributions to employees’ student loan debt. According to the press release of the partnership,

…”when employers elect to add this feature to their plan design, “employees whose student loan payments are processed through Student Loan Genius receive a pre-tax contribution to their retirement account from their employer based on that student loan payment. This contribution will occur whether or not they contribute to their 401(k) plan or receive any matching contributions. The contribution, paid as a flat dollar amount, or a percentage of the student loan payment or of the employee’s compensation, can be offered annually, monthly or for each payroll period” (Prudential Retirement, 2016)

As mentioned above, the novelty of this plan design makes it very difficult to speak of best practices or general methods. Among the companies that institute this design, there is variance in vesting, employer contribution amounts, and whether only federal student loans are covered.

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Student loans impact many financial decisions – such as when to purchase a home, start a family, where to live, and where to work. Companies that offer a program for student loan payment assistance are finding success in recruiting and retaining employees. Third-party administrators and recordkeepers would be prudent to conduct due diligence on innovative companies, such as Gradifi and Student Loan Genius, that create the platforms and systems to efficiently integrate payments into the complex ERISA world in which we reside. Because whether or not you believe student loan payments should be a recordkeeping conversation, it’s one that is already occurring.

References

Business Wire. (2017) 18 more companies offering Gradifi’s student loan repayment benefit. [Press release]. Retrieved from https://www.businesswire.com/news/home/20170629005283/en/

Greenfield, R. (2016) How much do employees really want student loan repayment? Managing Benefits Plans, p. 7+. Academic OneFile, http://link.galegroup.com/apps/doc/A452882275/AONE?u=lorascoll&sid=AONE&xid=20ee409e. Accessed 30 May 2018.

Lanza, A. (2016). More employers offer student loan repayment benefits: But is it a good idea for all student loan borrowers? [Blog post] US News & World Report. Retrieved from https://www.usnews.com/education/blogs/student-loan-ranger/articles/2016-03-09/more-employers-offer-student-loan-repayment-benefits

Lobosco, K. (2018). Student loan debt just hit $1.5 trillion. Women hold most of it. Retrieved June 6, 2018, from http://money.cnn.com/2018/06/05/pf/college/student-loan-stats/index.html?source=linkedin

Manganaro, J. (2018). Employers likely to ramp up student loan repayment benefits. Plan Adviser. Retrieved from https://www.planadviser.com/employers-likely-ramp-student-loan-repayment-benefits/.

Prudential Retirement. (2016, March 28). Prudential Retirement to offer Student Loan Genius’ 401(k) feature to clients [Press release]. Retrieved from https://studentloangenius.com/prudential-retirement-to-offer-student-loan-genius-401k-feature-to-clients/