Save for retirement or pay off student loans? SECURE 2.0 will help employees do both
If the pending legislation becomes law (and it's expected to be approved by Congress by the end of 2022), employers can boost 401(k) plans by implementing a student loan retirement match.
Eight in 10 adults with student loans said their debt was limiting their ability to save for retirement, according to a 2019 study by MIT Age Lab and TIAA. Employers may offer a generous retirement match but find that employees are not getting the benefit simply because they have to make a large student loan payment each month, while their peers without student debt build up savings.
Help may be on the way as part of SECURE 2.0, a comprehensive package of retirement changes pending in Congress. One component of the proposed legislation that has received bipartisan support would allow employers to count employees’ student loan payments toward their retirement match, effectively increasing retirement contributions for those employees.
Some details still need to be confirmed in the final legislation:
- What documentation will employers need to prove that a qualified student loan payment was made by the employee?
- Could a simple employee attestation be enough?
- When will the student loan match officially start?
The 2018 Abbott Private Letter Ruling cleared the way for Abbott Laboratories to implement a student loan retirement match in their employee 401(k). However, employers have been waiting for broader regulatory guidance, including whether the match could apply to 403(b) plans. SECURE 2.0 would provide that clarity to employers outside of Abbott, and 403(b) plans would be covered.
One example is a 25-year-old employee who earns $50,000 a year and pays $500 monthly on her $47,000 student debt. Although she is eligible for a 5% retirement match of $208 a month, she currently is not contributing. With the student loan retirement match, she could verify her monthly student loan payment, and her employer would contribute $208 into her 401(k) or 403(b). As employees start to pay down their student debt, they likely will see the value of that retirement account and match and start to contribute more directly.
The student loan benefit company Savi just published a report, Student Loan Retirement Match and What It Means for Employers. In the report written by Savi co-founder Aaron Smith, Savi encourages employers to consider two questions before implementing a student loan retirement match:
Are employees eligible for Public Service Loan Forgiveness? Combining this benefit with a student loan retirement match has several significant benefits. Employees will reduce their student debt and increase retirement savings, and lowering the amount employees pay on their student loans will reduce the cost of the student loan retirement match program overall.
How do student loans fit into a company’s broader financial wellness program? Student loan debt is not the only one significant financial challenge facing employees. It’s important to think about how student loan benefits and a student loan retirement match can fit within broader efforts around employee financial wellness.