With over 10,000 Baby Boomers turning 65 each day, the workforce is undergoing a significant transition. Millennials now make up the largest group represented in the workforce. Couple that with the staggering increase in student loan debt (up 450% since 2003 according to an article published by Fox Business) and you can see that the benefits world needs to undergo a significant transformation to keep the programs that we offer to employees relevant.
One of the most challenging aspects of this is in retirement benefits. With the shift to defined contribution plans (401(k), 403(b), etc.), we know that it is vitally important for our employees to begin saving as early as possible. The power of compounding returns is one of the most important features of these types of plans. However, as mentioned above, younger workers are entering the workforce with more debt and financial obligations than ever before. As benefits professionals, we are tasked with solving the challenge of getting employees to save for retirement early in their careers when they already have other significant financial burdens.
A recent development in the industry might help address this issue. Some employers have begun linking the repayment of student loans to contributions into an employee’s retirement plan. So, if the employee makes a student loan payment each month, the employer will “match” that payment with a contribution into the retirement plan. This helps encourage the employees to get their debt reduced by paying off the student loans, but also helps them take advantage of the compounding effect in their retirement plan.
In addition, the IRS has issued a Private Letter Ruling for an employer who has set up this type of contribution to their retirement plan. This means that IRS has confirmed that, under certain circumstances, employers can link employer contributions under a 401(k) plan to student loan repayments made by employees outside the plan.
There are some challenges that come along with this and it has the potential to make the administration of the retirement plan a bit trickier. However, employers have viewed the increased ability to attract Millennials and others with student debt as worth the tradeoff. Also, many studies like The Power of Employee Benefits in an Uncertain World by MetLife have shown that if you can help improve the overall financial wellness of your employees, then you have a happier and more productive workforce. It truly becomes something where everyone can benefit and come out better off.
If you have any questions about how this might work in your plan or just want to explore this idea further, please don’t hesitate to reach out to your Nyhart consultant.