Student loans crippling 401(k) contributions: Will SECURE 2.0's 'matching' change that?
Student loan borrowers making payments have significantly lower 401(k) contribution rates, however, some of the impact of the payments was lessened by auto-enrollment or employer contribution match, says a new report.
Employees who are making payments on student loan debt are contributing less to retirement savings plans, creating a shortfall that can add up over the career of a participant.
A report published by the Employee Benefit Research Institute and J.P. Morgan Asset Management found student loan debt payments have a significant impact on 401(k) contributions and account balances. The organizations are conducting ongoing research to understand how various financial factors impact employees’ retirement preparations. Using recordkeeper and banking data, the study tracked whether retirement plan contributions among active participants changed when student loan payments started or stopped.
The study found that making student loan debt payments significantly negatively impacted the average employee contribution rate and account balance. For those who had payments starting after the beginning of the three-year study, 25.3% reduced their contribution rates by more than 1 percentage point. Of the participants who were making student loan debt payments at the beginning of the study period and then stopped, 31.6% increased their 401(k) contribution rate by at least one percentage point.
“Some of the impact of the student loan payments appeared to be lessened by the design of the 401(k) plan such as automatic enrollment or employer contribution match levels as the median employee contribution rate for all participants studied was near the level of the maximum amount matched and/or common default rates in automatic enrollment plans,” explained Craig Copeland, director, Wealth Benefits Research, EBRI.
Provisions in SECURE 2.0, which took effect Jan. 1, 2024, address the pressure of paying on student loans by allowing matching contributions to 401(k) plans from student loan debt payments. This would help participants who aren’t contributing at the full match level or at all to their 401(k) plans receive at least the matching contributions to allow them to build up assets for retirement. However, this feature could have the unintended consequence of lowering the contributions of some who are already contributing, as they would not be missing out on the matching contribution by not contributing, the report cautioned.
Related: A new benefit for employees with student loans: The 401(k) match
Financial wellness programs can help with contribution and debt payment decisions by considering the total finances of the participant.
“The payment status change can also be an important touch point in helping to improve the financial wellbeing of participants, as many appear to be making important financial decisions at this time and better information could improve outcomes,” said Sharon Carson, retirement strategist, J.P. Morgan Asset