Young Savers' 401(K) Plan Is Complicated By Student Loan Debt‍

As part of a recently enacted benefits law, employers can soon decide whether to count loan repayments made by workers as contributions to their 401(k) plans, but many employers are wary about making that decision because the benefits of the federal loan forgiveness program are so unsettled.

‍

SECURE 2.0 Act (Public Law 117-103) provides this program as part of addressing concerns that students with student debt are too often funneling money to their lenders instead of their 401(k) plans, which means they are missing out on the "free money" that employers offer through matching contributions to their 401(k). As a result of uncertainty surrounding the Biden student debt relief plan, which is currently being blocked in federal court, as well as proposed rules to change income-based repayments, employers’ use of the program could be hindered.

‍

There will be a SECURE 2.0 provision enacted at the beginning of 2024, meaning employers will begin to have the option to adapt their benefit plans with plans that treat student loan repayments just like employee elective deferrals in qualified plans once the SECURE 2.0 provision is implemented.

‍

The first step towards generating a sizable principle investment in retirement is making sure young workers begin saving for retirement early in life. Legislators aim to address a growing gap in retirement access by allowing matching funds to be calculated based on student loan repayments as opposed to strictly elective retirement deferrals.

‍

There are mixed signals coming from employers about how they should communicate the new program and how student loan forgiveness should be incorporated into their decision to enrol in the program as part of their employee communications.

‍

Brightside Benefit Inc.'s head of financial solutions, Sophie Raseman, a financial wellness benefit provider, said “This is a car crash we can slowly predict.” As of today, we don't know where we're going to end up or where we're going to land by the beginning of 2024. I've never seen so many moving parts in my 20 years of studying student loans.”

‍

Folly of forgiveness

As benefits advisers point out, the input of employees is a key factor when deciding whether to amend 401(k) or 403(b) plans. It could have a dramatic effect on how interest in student loan retirement plan benefits might be driven by the Biden administration's Covid-19 forgiveness plan, which cuts student loan forgiveness by between $10,000 and $20,000 per borrower.

‍

Nevertheless, recent changes proposed by the US Department of Education to its income-contingent repayment plans could result in a significant reduction in student loan payments for many workers, as the future of income-contingent repayment plans remains unclear. 

‍

According to Raseman, a small monthly payment could have been used to build a nest egg instead of spending money on monthly payments.

‍

The uncertainty surrounding the decision to change the retirement plan of an employer or employee to help students repay their student loans is overwhelming at the moment, she emphasized. It is a question that the employer or employee should know the full picture before making a decision to do so. In this case, there would be money that would have been sitting in the 401(k) and generating interest.”

‍

It was decided in February that the US Supreme Court would rule on two challenges to Biden's partial Covid-19 student loan forgiveness plan. It has been indicated that if the conservative majority strikes down the order, White House attorneys will look for other ways to reduce borrowers' loans even if the conservative majority strikes down the order.

‍

Matthew Chiarello, a partner at Snell & Wilmer LLP in Phoenix, thinks the Supreme Court's decision is very important, largely because it could raise interest in the student loan market. Employees may then seek assistance from their employers to find other ways to pay for education expenses."

‍

Unknowns are abounding

It appears that some of the growth in 401(k) account balances over the time period 2016 to year-end 2020 belongs to younger and more affluent 401(k) participants in their 20s, demonstrating some progress in saving between those in their 20s and those in their 40s.

‍

In general, the most rapid growth rates of all 401(k) plan participants were those whose initial account balances were relatively smaller, but they benefited both from market returns and from contributions, which contributed to the growth rate as their average 401(k) account balances grew by 57.4% on average per year,” Sarah Holden, Senior Director of Retirement and Investor Research for ICI, said.

‍

Even a large percentage gain, even if it happens, is often not translated into a nest egg that is growing substantially in real dollars for young workers that are new to the 401(k) market, because the starting point is lower. It is possible, however, that employer attention could be detracted from revising long-term plans for these savers because of the narrative of growth among these savers.

‍

If firms choose to adopt the SECURE 2.0 Act's student loan matching program next year in order to be able to support younger retirement savers, they still know very little about what the program will look like if they opt to implement it. 

‍

When conducting retirement plan non-discrimination testing, Chiarello said that employers have a lot of questions about whether or not their fiduciary duties are being fulfilled regarding the repayment of loans and how loan-based matches would compare to the balances of employees’ accounts when conducting nondiscrimination tests.

‍

Moreover, the law was unclear whether the matching program only affected eligible federal student loans or private student loans, repackaged loan products, or refinanced loans. Also, it is unclear whether student debt is a consequence of the student or by the borrower, who can sometimes be a relative or friend of the student.

‍

It has been reported that the IRS is attempting to provide some clarification this summer, but that could be too little too late given the uncertainties surrounding other loan programs.

‍

There are parents who undertake student loan debt on behalf of their children,” Chiarello said. “Some of these things are clearer than others, but it is still unclear exactly what the boundaries of the student loan debt burden system will look like.”