Every company that values the human capital that walks through their door every day wants to create a range of differentiated benefits – benefits that not only work harder but are ones that their people can truly appreciate.
For many of these folks, particularly those in their 20s and 30s, it can be challenging to think about putting away money for retirement when they still have student loan payments. It begs the question: If your employees are dealing with high student loan debt, what can you as an employer do about it to alleviate some of their financial burden? What if you could utilize a financial mechanism to help them tackle the challenges of paying off student loans and ultimately saving for retirement?
This isn’t some far-off pipe dream. As the technology progresses, you can be sure that we will see more done to help consolidate, manage and pay loans at the employer level.
For example, let’s imagine that you have a bright young shining star of an employee who has been with you for the last five years. He’s due for a nice pay raise. Under the scenario above, you could approach him by saying, “Do you want to put 50% of that raise into your 401(k)? Or would you like to allocate more of it toward addressing your student loans?”
It’s a fascinating possibility for employers. For one, it goes beyond the standard 401(k) employer match to show how you are giving your employee the kind of benefits that work even harder and in a more customized fashion around a real need that they have been facing for quite some time.
Think of the bigger picture here when people are burdened with high student loans. What do you think that does to the other plans they have in their lives? They tend to defer a number of important life events. Marriage. Children. Buying that 1st home. A new car. All of it gets pushed out further on the timeline. Even if that deferment is for a year or two, a person can feel behind the curve in terms of where they’re “supposed to be” in life.
Contrast this picture with the one from a plan sponsor who can help pay off these loans or put money into a 401(k) plan. Suddenly, that young person who has had a world of financial burden now has options and choices to pay down the student loan and/or save toward retirement. What do you think that might mean for the possibility of long-term employee retention? Assuming other factors in the culture and advancement possibilities are positive, we believe it’s going to matter a tremendous amount. Helping an employee to prepare for a healthy retirement down the road is one thing. Helping them with their financial challenges today is another. At a minimum, that should give someone who is thinking about changing jobs some serious pause.
As your Chief Retirement Officer, it’s exciting to me to think about how retirement plan design can innovate further to address these issues, providing plan sponsors an environment for better financial wellness to occur. This, in turn, can empower more people to save for the retirement they deserve to have.
Sounds Fantastic – So How Can It Actually Work?
First, automatic enrollment into a plan is great but in the same breath, we have to understand what makes sense for how and why the person wants to contribute. Is it to contribute toward their retirement, pay down student loans or set aside savings for another purpose, such as emergencies?
Some ideas being talked about right now include an auto-enrollment in which part of the contribution goes in pre-taxed while the other part goes in as an after-tax contribution. Could that after-tax contribution be placed in a low-risk investment fund that builds over time? It certainly seems feasible and a plan advisor could be especially helpful with guidance on building such a fund.
So what happens in the event that an employee reaches their goal with the after-tax contribution such as a key portion of their student loans? The more creative and flexible plans should allow for the employee to switch their contribution path if they wish so that funds can flow into the 401(k) side in a traditional manner. The employer could still provide a match.
One crucial element that’s so important to the success of this type of mechanism – money from the after-tax contribution side must be able to be taken out for distribution whenever the employee needs it. It’s a lot more practical for the employee who might risk halting contributions to their 401(k) due to their also making payments on a loan. Taking money out of after-tax contributions, on the other hand, gives the employee the flexibility they need when they need it while working toward a secure future with contributions that the employer can match.
A New Frontier In Retirement Plan Design?
When employers integrate a student loan benefit into their retirement plan design to help their employees pay down their student debt, it opens up a lot of interesting, creative possibilities.
Namely, we could see more employers offer to withhold a student loan payment from the employee’s paycheck and conveniently send it to the loan provider. We may also see more employers make contributions on the employee’s behalf toward a 401(k) as the employee pays down their student loan (after all, they can’t make as much headway on retirement contributions by themselves if they’re saddled with student debt).
These avenues and more present a unique opportunity for employers to help their people reach more of their present-day goals while they provide retirement planning solutions too. There are definitely some technical aspects to be aware of, such as the types of employees you might offer this benefit to, the proper circumstances in which to offer matching contributions and so forth.
That’s why it’s smart to talk to Fiduciary Financial Partners today. As innovations in plan design technology continue to surface, the last thing you want is for your plan to feel out of touch with the financial realities of what your people need most right now. Together, we can evaluate the types of plan options that are possible to help you customize fresh solutions that work for more of the challenges your employees are facing. Because when you can show them you recognize their goals for every stage in life, that goes an awfully long way. Give us a call and let’s discuss where the future of your plan might be headed next at 630.780.1534.
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