Benefits Products & Services
By Thomas A. McCoy, CLU
STUDENT LOANS INHIBIT DC PLANS’ EFFECTIVENESS
EBRI webinar highlights one employer’s innovative solution
An albatross of student loan debt hangs over many of today’s workers, limiting their opportunity to create retirement security through their defined contribution (DC) retirement plans. It isn’t only younger workers who are affected; a significant number of parents are helping pay down loans incurred to educate their children, cutting into their own retirement plan contributions.
How much of a barrier is student loan debt to achieving retirement security for workers of all ages? And can plan sponsors do anything about it? That was the topic of a recent webinar presented by the Employee Benefit Research Institute (EBRI).
“Six out of ten working adults with education debt would consider switching companies to one that offered a student debt employment benefit.”
Divisional Vice President, Compensation and Benefits
Josh Cohen, managing director and head of institutional defined contribution for PGIM—the asset management business of Prudential Financial—noted at the webinar, “An increasing number of employers are focused on helping their workers manage, and in some cases pay down, their student debt in order to attract, retain and satisfy their employees.”
Lori Lucas, president and CEO of EBRI, said that according to the figures from the Federal Reserve’s Survey of Consumer Finances, the median amount of family student loan debt quadrupled between 1992 and 2016—from around $5,000 to $20,000. Over that time period, families with student debt rose from 11% to 22% of the population.
Broken down by age group, the Fed figures show that student debt for young families (headed by someone 35 years old and younger) rose from 24% in 1992 to 45% in 2016. A lower percentage of older workers were carrying student debt, but their rate of growth was higher than for younger workers over the same time period—rising from 6% to 24% for 45- to 54-year-olds and from 3% to 13% for 55- to 64-year-olds.
So, what effect is this booming growth in student loans having on retirement savings? According to the Fed figures, families headed by college graduates 35 years old or younger with student loan debt had defined contribution plan balances averaging $33,000; those without student loan debt averaged $54,000. Among those headed by 45- to 54-year-olds, those with college loans averaged DC balances of $151,000 vs. $303,000 for those who were debt-free.
The same disparity exists among those aged 55 to 64 years old, where the Fed study used median DC plan balance figures to compare the retirement balances. Those with student loans had median retirement balances between $40,000 and $48,000, while those without student loans had median DC plan balances of $90,000.
Prudential Financial sponsored independent research at the start of 2019 that sheds further light on the impact that education loans are having on retirement plans of parents who are paying down the balances of their children’s loans. It found that 57% of parents with this debt expect to delay their retirement date or never retire, compared to only 36% for those who were not paying off student loans.
Prudential’s Student Loan Survey also calculated that a hypothetical married couple, both age 55, who carried an average loan amount for educating two children would have to modify their retirement one of two ways: either work two years past their planned retirement age of 65 or reduce their sustainable income in retirement by 15.7%.
“Clearly, student loan debt is taking a toll on workers’ ability to retire on time,” said Lucas.
Meeting the two needs simultaneously
One employer, Abbott, a healthcare company with 103,000 employees, including 29,000 in the United States, has created a program that attacks this problem head on. Abbott’s Freedom 2 Save program enables workers to increase their 401(k) plan balance by paying off their student loans. Mary Moreland, divisional vice president of compensation and benefits for Abbott, explained to the webinar audience how it works.
“Our 401(k) has a 5% match as long as the employee contributes 2% of pay to their 401(k) account. Under the Freedom 2 Save program we have expanded the way they can receive that match in the 401(k); they can also receive it by contributing 2% of their pay towards their student loans. This has a real impact on both their retirement saving and how quickly they pay off their student loans,” Moreland said.
“For example, someone joins Abbott with a starting annual pay of $70,000 and takes advantage of this program. We estimate that they can accumulate as much as $54,000 in their 401(k) account over a 10-year period without ever putting a penny of their own money into the 401(k), just by paying down their debt (assuming 3% merit increases and an annual investment return of 6%).” This money would, of course, have the opportunity to grow considerably over the employee’s working lifetime.
“At the same time,” Moreland continued, “by taking the 2% contribution that would otherwise go into their 401(k) and putting it toward their student loan payments, they would, on average, pay off their loan three years sooner and save thousands of dollars of interest.”
Only loans taken out to finance the employee’s education are eligible for the program—not loans being paid for a son or daughter’s education, for example.
Abbott began enrolling employees in the program in August of 2018. Within a year there were around 1,000 employees enrolled with average student loan debt of $38,200. The highest loan balance was more than $300,000. Two-thirds of the first year’s enrollees are employees who were hired in the last two years. Two-thirds of enrollees are under age 35; 10% of the enrollees are over age 45.
Moreland noted that Abbott’s 5% 401(k) match was already an established cost before Freedom 2 Save was established. The focus of the program is on investing in their employees to generate retention and recruitment successes. The resulting productivity gains could amount to $5 for every $1 invested, she estimated.
“Our own research showed that nine out of ten college students with student loans say it is important to find an employer with student loan benefits,” she said. “Perhaps even more important, six out of 10 working adults with education debt would consider switching companies to one that offered a student debt employment benefit.
“We continue to get good feedback on the program from our interns and job candidates,” she added.
As student loan balances continue to grow, it seems inevitable that employers will be looking for ways to provide tuition loan assistance as a recruitment and retention tool. There are simply too many high-quality employees who are unable to adequately take advantage of their defined contribution plans because of the student loan balances hanging over them.
EBRI’s 2018 Financial Wellbeing Survey of employers with at least 500 employees that have adopted or are interested in adopting financial wellness initiatives found that one-third of them offer, or plan to offer, a student loan debt program. For now, plans as robust as Abbott’s appear to be the exception.
“Many of the programs to help with student debt are being conducted on a pilot or ad hoc basis as employers seek to make a business case for them before they decide whether to roll them out more broadly,” Lucas said.
Insurers—working with plan sponsors and brokers—have made substantial progress in convincing workers to contribute more to their defined contribution accounts. Employers that can find ways to help workers pay down their student loan debt can make that process a whole lot easier. That, in turn, will lead to better retirement security, benefitting both employers and employees.
Thomas A. McCoy, CLU, is an Indiana-based freelance insurance writer.