Leadership   //   April 16, 2024

Is this the solution to America’s retirement savings problem?

There could be some light at the end of the tunnel for young people repaying eye-watering student loans.

Employers now have the option to match student loan repayments with 401k contributions, thanks to the SECURE 2.0 Retirement Savings Act, which has begun to gain traction in the U.S. One of the stipulations of the bill (the full effects of which will roll out of the next four years) is that employees that make payments on student loans will receive tax-advantaged contributions to their retirement accounts.

The law is being rolled out at a time when America is in a “retirement crisis,” as BlackRock CEO Larry Fink put it at the end of March, when raising the flag that the situation will impact younger generations significantly.

“What I do know is that any answer has to start by bringing young people into the fold,” Fink wrote in his annual shareholder letter. “Young people have lost trust in older generations. The burden is on us to get it back. And maybe investing for their long-term goals, including retirement, isn’t such a bad place to begin.”

It’s significant when U.S. student loan borrowers owe $1.74 trillion in federal and private student loan debt, with the average U.S. household with student debt owing $55,347. It’s impacted the younger generation’s financial welfare significantly, and in some cases has required them to put retirement savings on hold while they pay back their student loans immediately.

“I fully anticipate this next generation that is just graduating college coming into the workforce to ask about this benefit,” said Molly Beer, area executive vp of insurance company Gallagher’s retirement practice. “The idea that someone doesn’t have to choose between their future and paying off their financial obligations of the past is no doubt exciting.”

But what will this student loan repayment match to 401k contributions really look like in action? We spoke to experts to find out more.

Who’s eligible?

Effective as of this year, the SECURE 2.0 Act has opened the door for employers to match their employees’ student loan payments with contributions to retirement accounts. That means if you pay $200 toward your student loans, your employer will match that for a 401k contribution if you’re enrolled.

“For that specific employee that would’ve had to make a choice between saving with their 401k or making a student loan payment, this is like the best of both worlds,” said Robert Farrington, an expert on student loans and the founder of The College Investor. “You can make that payment, and you get that money into retirement which will hopefully grow and compound into the future.”

While it’s an exciting development for those with college debt, others remain skeptical about it. For instance, many businesses question whether or not it’s a fair benefit when a comparable alternative isn’t offered to older generations or those without degrees.

“For that specific employee that would’ve had to make a choice between saving with their 401k or making a student loan payment, this is like the best of both worlds.”
Robert Farrington, founder of The College Investor.

“Where I see a lot of HR benefit managers concerned is on this fairness factor, especially if they have a lot of older workers in their company,” said Farrington. “The older workers might not have student loans and they might be wondering, ‘Well, why can’t I make my mortgage payments and you give me an employee match?’ I think a lot of larger organizations have been struggling with that question on whether they should decide to offer this to their employees or not.”

With that said, there are some benefits to older workers, for instance if they have co-signed on one of their children’s loans — that means they’re also eligible.

“We’ve had to educate employers that this benefit extends not only to your own personal debt, but repayments that you’re making to your partner, or even if they’re loans that one of your children has,” said Edward Gottfried, head of product at Betterment at Work, which is offering a commercial solution for this. “If you’re actively repaying those loans, it qualifies for treatment as eligible for the 401k match. The benefit is more usable by your employees than you may initially believe. There is a little bit of a misconception that only your youngest employees are dealing with student loans.”

But this new initiative is especially helpful when, according to a new survey from The College Investor, just over half (53%) of borrowers felt they could afford their monthly payments. Farrington said anticipates an overall slow adoption of this benefit, and said he would be shocked if he saw the majority of employers adding it as a benefit.

Systems in place

A big barrier to implementing this match is if your retirement savings vendor doesn’t offer the capability to do so. However, more companies are beginning to roll it out, including HR software firm ADP, which could impact over two million people, and Betterment at Work, which launched a commercial solution in January.

As of April, ADP’s plan sponsors have had access to student loan retirement matching and other student loan and tuition-related benefits. With the launch of this program, done in partnership with student loan solution company Summer, employers that use ADP for retirement services can opt in to an easy-to-implement solution to match employees’ student loan and retirement payment plans.

“Starting this past October, student loan payments resumed for the first time in three and a half years and those payments came rushing back,” said Will Sealy, co-founder and CEO at Summer. “A lot of those individuals are pulling back on their contributions to their retirement plan because the money has to come from somewhere to pay their loans that are due again.”

Sealy said they don’t have specific estimates of how many employers will take advantage of the benefit through ADP yet, but given the company’s vast reach, it’s expected to be significant. The firm is anticipating adding three to four more retirement providers by year’s end to also roll out this matching scheme.

“A lot of those individuals are pulling back on their contributions to their retirement plan because the money has to come from somewhere to pay their loans that are due again.”
Will Sealy, co-founder and CEO at Summer.

“We need to do everything we can to incentivize people and their employers to provide support for people’s financial security,” said Sealy. 

But will employers take advantage of it?

Just because an employer’s retirement savings provider has the capability to offer this match, doesn’t mean they will. That’s in part because it may only help a small part of the workforce.

But, Eric Silver, head of retirement and head of deferred compensation programs at insurance company Guardian, disagrees with that sentiment. “In my opinion, if I can help a single person, it’s worthwhile,” said Silver.

In January, Guardian launched its 401k match on student loan repayments to help colleagues who could not take full advantage of Guardian’s 401k match due to their student loan debt. That means that colleagues whose contribution into Guardian’s 401k does not reach the threshold to earn the full match contribution, will be able to continue to pay down their student loan debt and still receive Guardian contributions to help build their retirement account and financial wellness.

One of the reasons Guardian rolled this out is because internal surveying solidified its hunch that people weren’t making 401k contributions because of the burden of student loan repayments. While they have a 94% participation rate in their 401k across its 5,500-person U.S. workforce, that remaining 6% still mattered.

“I took the time to really talk to folks who couldn’t make that full contribution,” said Silver. “A lot of what we were hearing was that people were laden with this student debt, which is not uncommon across the United States. For me, the real push was how to help people overcome this burden that they felt with their student debt.”

So far, 100 people have signed up for the match, which they will see at the end of the year because it only has annual reporting. 

Why it matters

This benefit is also helpful for an employer when it comes to retention. Medical device company Abbott Laboratories has famously championed matching like this. Through its Freedom 2 Save program, benefits-eligible employees who apply at least 2% of their salary toward paying off a qualifying student loan will receive a 5% company contribution into their 401k annually. The health company published a blueprint at the end of 2023 on how to do this, knowing that more employers will take advantage of similar programs now that the SECURE 2.0 ACT is effective.

According to Abbott, more than 2,500 total employees have enrolled in the program since its 2018 inception, and more than 1,300 employees were enrolled as of the year’s second quarter — about 3.8% of Abbot’s eligible employee population.

Abbott also found that employees who participate in Freedom 2 Save are 19% more likely to stay with the company.

Gallagher’s 2023 Physical and Emotional Well-Being Report found that only 13% of employers offer student loan forgiveness, while 12% have student loan repayment options included in their benefits packages. By including student loans in their benefits offerings, employers not only ease millennials’ and Gen Z’s financial burdens, but they also improve employee retention and attraction.

“With younger generations coming out of school, the demand on employers to do more with the 401k is just going to escalate and we’re going to have to deliver solutions,” said Beer.

“This really is an incredible retention tool for employees,” said Sealy. “One of the things employers have repeatedly told us is that when they’re recruiting and retaining the new workforce coming in, predominantly millennials and Gen Z employees, we are talking about our great 401K match, and what we’re hearing increasingly is, ‘I’m retiring in 40 years but I have $80k in student debt now, what can you do for me?’ Employers are struggling to figure that out.”