Giving Them a Break

Art by Cate Andrews

Forty percent of workers not saving for retirement blame it on student loan debt, according to a recent survey by Prudential Financial.

“If workers get help with their student loans, they are more likely to contribute to their retirement plan,” observes Joe Ellis, senior vice president at CBIZ Employee Benefits in Philadelphia. “I see the role of the adviser as being critical and student loan repayment programs as a great way to get more money into the 401(k) plan.”

Student loan debt relief programs, whereby an employer pays a portion of a worker’s student debt, are offered at only 4% of companies today, according to data from both Aon Hewitt and Mercer. However, the burgeoning of student debt, the highly competitive job market and employers’ growing adoption of financial wellness programs as a company benefit may increase interest and use of such debt relief. Advisers who suggest a relief program to retirement plan sponsors can distinguish their practice and align themselves more strongly with clients and participants, experts say.

The role of the traditional retirement plan adviser has expanded, beyond just the 401(k) plan, to encompass “financial wellness, and student loan relief is one of the issues under that umbrella,” says Snezana Zlatar, senior vice president and head of full service product and business management at Prudential Retirement in Woodbridge, New Jersey.

The marketplace for these programs offers many different repayment approaches, says Rob Reiskytl, principal and retirement consultant at Aon Hewitt in Minneapolis. Skilled advisers can play a role in helping plan sponsors assess their options.

Student-Loan-Relief Approaches

One way employers can provide student loan debt relief is by partnering with an outside vendor that offers refinancing, with the employer picking up the transaction cost, Reiskytl says. “This is a real benefit because many individuals have more than one loan from different institutions, so it can be confusing,” he notes.

Student Loan Genius in Austin, Texas, provides both a refinancing and a repayment platform. Matt Beecher, the company’s CEO, says users of the platform owe an average of $52,000, spread over 10 different loans. His platform has an algorithm than can take an individual’s student loans through “200 various planning models that analyze the interest on the 100 federal debt consolidation programs and 5,000 private refinance programs that exist. It’s a very complex portfolio management system,” he says.

A second way an employer can help its workers address the debt is by making direct contributions to the debt issuer, Reiskytl says. Typically, these are monthly contributions up to a lifetime ceiling, perhaps of $5,000 or $10,000. This helps greatly with retention, he says.

Several of Mercer’s customers with high turnover are looking to student debt refinancing programs, says Neil Llyod, head of the company’s U.S. defined contribution (DC) and financial wellness research, in Vancouver, British Columbia. “An individual at an organization is likely to stay until he gets his loan paid off. For [these people], it is such a big issue that it can align them with the organization,” he observes.

With unemployment at 4%, “we are approaching or are at full employment in the U.S.,” Beecher says. “With tenures at companies averaging 18 months and the cost of replacing workers who leave costing 1.5 to two times their salary, employers cannot rely on the old playbook.”

Retention of its largely Millennial work force is the reason why Millennium Trust rolled out a student loan debt repayment program, from Fidelity Investments, four months ago, says John Samaan, senior vice president and head of human resources (HR) with Millennium Trust, in Oak Brook, Illinois. The custodian company surveyed its employees last year and found this was the No. 1 benefit they wanted. Millennium Trust expected 10% to use the program, but the take-up rate is 20%, “and, as we hire more people who come out of school, that will rise,” he says.

There are additional, creative ways that employers can address the student loan debt issue, Reiskytl says. Abbott Laboratories, for example, is not paying off its workers’ student loans, but diverting the match money they would otherwise have received in their 401(k), he says.

Aon Hewitt is also discussing creating “life planning accounts” with employers, he adds. “We recognize that, when we work with employers, student loan debt is only one aspect of a broader financial issue, which includes paying for college, creating an emergency fund, saving for the purchase of a home or any one of a myriad financial challenges people face,” he says. “We are talking with many employers about life planning accounts.”

The goal of this last approach is to encourage employees who have decided to first pay down their student loan debt and then contribute to their 401(k) to do both simultaneously, taking a loan from their retirement plan account to pay off the debt. “We have mathematically modeled this scenario and found that, after five or 10 years, an individual can end up with significantly more retirement savings than if he had gone the other route,” Reiskytl says.

Comparing Options

“Advisers can definitely play a critical role in helping plan sponsors decide which approach they want to take, as well as with the implementation of the program—[e.g.,] conducting a vendor search and providing ongoing management of the platform, which they can charge for,” Reiskytl says. “The primary benefit an adviser can derive from this is helping sponsors make the best use of the money they spend on benefits, and to serve as a trusted adviser.”

Essex Financial as yet has no clients offering the repayment benefit but is in discussions about its merits with 15 companies that are struggling to recruit talent, says James Sullivan, vice president and financial adviser with the advisory firm, in Essex, Connecticut. However, one issue causing sponsors to hesitate is there currently are no tax breaks for companies that provide such a repayment program, he says. “That is pending legislation, which would be a big boon for this,” he says.

Another factor for advisers to consider, Sullivan adds, is that, while 4% of companies offer a student loan repayment benefit, this doubles among companies with 40,000 employees or more. As with 401(k) plan design features, employee benefit features tend to move down-market—a fact worth keeping in mind, he says.

Additionally, industries such as engineering, medicine and law, with highly educated employees, are showing great interest in the programs, says Meera Oliva, chief marketing officer at Gradifi, a student loan repayment platform company in Boston. “Employees are incredibly grateful for this benefit, so it raises their engagement [in overall company benefits],” she says.

If a sponsor is worried about the cost of a student loan repayment program, it should know that some of the companies adopting them pay for them with the money from unused benefits, says Laurel Taylor, founder and CEO of Boston firm FutureFuel.io, a digital matchmaker of sorts for highly skilled employees wanting help to pay off student debt and employers willing to give it. “Education reimbursement budgets are 60% underutilized, so employers are simply repurposing them,” she says.

Employers are looking for benefits that “help employees in ways that are meaningful to their lives,” notes Ashwini Srikantiah, vice president of emerging products at Fidelity in Boston. This is why Fidelity rolled out its student loan refinancing and repayment program, this year. This program “is really helping people in ways they need it and truly value,” she says, and is a benefit Fidelity expects will become increasingly popular in the years to come.