Student loans blocking your retirement savings? A change to federal law MIGHT help [The Boston Globe]

Since 2015, employers have been contributing modest monthly amounts (e.g., $50) toward employee student loans and achieving profound results:

  • 13% faster hiring timelines,
  • 36% longer employee tenure, and
  • Greater gender and cultural diversity.

This year, more companies than ever will offer direct Student Loan Repayment to accomplish their talent objectives. 

While that happens, other employers will confuse retirement plans with student loans and fall even further behind competing firms.

A small provision included in the 2023 Secure Act 2.0 now allows 401(K) plan sponsors (employers) to calculate their matching 401(k) contributions by counting the amount of employee student loan payments as if they were elective deferrals. In theory, this might help employees who are unable to participate in 401(K) plans to participate now and receive company matching contributions.

A late April 2024 Boston Globe article profiled Secure 2.0-driven 401(K) student loan assistance plans. The full article can be found here, though the headline says it all: “law change might help [people save more for retirement]”…but it’s unlikely to do even that, much less help employers achieve their talent objectives.

First, the student loan stuff in Secure 2.0 is really confusing. What does an employee have to do? When? What does the employer have to do? What about ERISA, plan documentation, and testing? When are the contributions made? What if an employee with student loans already contributes to the 401(K)…which most do…then don’t they miss out on receiving any benefit from the student loan thing? Most importantly, would any employee ever choose to join a company, or stay, because the company has agreed to “count [my] student loan payments as elective deferrals for the purposes of matching [my] 401(K)”?

Second, very few, if any, of the people who are not participating in 401(K) plans today even went to college. As Peanut Butter CEO, David Aronson, said in the article, “Typically, only 15% of people who are offered a 401(k) decline to participate, according to Vanguard. Most of those people didn’t go to college, so they don’t have student debt. So, what will these employers get? Maybe, one or two more percentage points of participation in their 401(k) plans. It’s just not going to make a difference for the employers or employees.” A representative from Eversource also echoed this point in their discussions with the Globe stating, “because the vast majority of our employees actively participate in our 401(k) programs and take advantage of the company match that’s already available, we’re not currently implementing the [provision] that allows for the treatment of student loans repayments as 401(k) contributions.”

Employers will make their own decisions. The wise ones won’t wait. In fact, many already haven’t waited. Companies seeking to attract, retain, and engage college-educated workers can begin offering direct Student Loan Repayment today.