Client Service May 8, 2018

Technology and Retail Clients Most Burdened by Student Debt

Data provided by CommonBond shows that workers in the technology and retail industries are most straddled with student loan debt; even workers in industries less impacted by student debt say they believe employers should help.

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Student loan education, repayment and refinancing specialist CommonBond recently hosted a panel discussion about the topic of “the missing benefit,” by which the firm means payroll integrated student loan repayment and refinancing support for employees.

Journalists and financial industry professionals were invited in by the firm to hear speakers, including Healther Coughlin, U.S. solutions leader for financial wellness at Mercer, along with Naz Vahid, managing director and law firm group head at Citi Private Bank, and Tara Malone, vice president of employee benefits for Young & Rubicam Group. The panel spoke broadly about the student loan debt challenges facing workers across the United States, and they all agreed that both employers and employees will benefit from greater uptake of student loan repayment benefits.

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But what exactly does it take to roll out a student loan repayment benefit? The panel, which also included CommonBond VP of Partnerships Leigh Gross, walked the audience through some key steps for successfully crafting and implementing these benefits.

The first step is simply to conduct research and collect some preliminary data, with the goal of reaching a better understanding of the workforce’s student debt burden. Plan sponsors may be surprised to learn that student debt is not just effecting newly hired Millennials, the speakers noted, pointing to data showing U.S. student loan debt has topped $1.4 trillion, including nearly $75 billion in “parent PLUS loans” taken out by individuals on behalf of their college-age kids.

“Take a systematic approach to understanding your employees’ needs related to student debt,” Gross suggested. “This could involve conducting both formal and informal organization assessments to understand your employees’ student debt situation from the bottom up, and how the debt situation could change in the near- or mid-term future. While internal surveys are an option, they may not always accurately capture the extent of your team’s financial hardships, depending on how willing your workers are to open up about this highly sensitive subject.”

Using a third-party to compile qualitative and quantitative data may help provide a clearer and more accurate picture of the employees’ student debt and financial wellness, the experts agreed. Once this baseline is established and some basic benchmarks have been set, the experts suggested this is the time to bring the idea of student loan debt repayment to top company executives and HR leaders. The benefit should be framed in the context of promoting overall compensation and other benefits, such as the health care plan and the retirement program.

“The data, paired with specific recommendations to address your employees’ unique student debt situation, will be key to getting executive buy-in to launch an effective student loan benefit program,” Gross stressed. “Once you have a better understanding of your employees’ financial wellness, you will be in a much stronger position to evaluate whether all your benefits are being leveraged by as many employees as they should be.”

Gross noted that it is common to see employers think about adding student loan repayment benefits in the context of reallocating budget dollars spent on less-impactful benefits.  

“Offering student loan benefits to your employees is also a powerful social statement, and this should be discussed up front as a great boost to the employer’s image, both internally and externally,” Gross added. “Relying on a provider that you trust and that has substantial subject matter expertise is key. Make sure the provider you’re working with reflects those same social values.”

Once an employer commits to delivering student loan repayment benefits, Gross said it will be helpful to assign a lead internal implementation specialist to oversee the launch process and the ongoing administration of the program. The broader benefits staff can support this person and help deliver a strong communications plan to best educate employees about the value of the benefit.

“The last suggestion is to make sure that you are consistently measuring the impact and iterating over time,” Gross concluded. “The evidence from plan sponsors who have introduced these benefits is already overwhelmingly positive from a worker attraction and retention perspective.”

Student debt impact by industry

According to survey data shared by CommonBond, the technology industry is the number one industry affected by student debt, with 53% of workers currently having student loans taken out to fund their own educations. In this industry, CommonBond reports, an outstanding 65% of employees carrying student debt took out $50,000 or more in student loans. As a result, more than 77% of employees believe that their employer should take an active role in helping them improve their financial well-being, irrespective of whether they currently have student debt or not (this statistic tied with retail and finance). Tech is actually one of the few industries staying ahead of the curve, CommonBond says, with 85% of human resources respondents planning to enhance their student loan benefit offering in the next three years.

Retail is the second-most affected industry by student debt, CommonBond says, with 49% of respondents currently having student loans. At the same time, retail “has one of the highest discrepancies in providing financial well-being programs.” The vast majority (95%) of human resources respondents believe they should take an active role in helping improve their employees’ financial well-being, but only 65% of employers in this industry actually do provide financial wellness benefits.

The healthcare and pharmaceuticals industry is the third-most affected sector by student debt, with 45% of employees revealing that they currently hold student loans taken out to fund their own educations. With 55% of those carrying student debt having taken out $50,000 or more, healthcare and pharmaceutical employees strongly believe their employers should take an active role in helping them improve their financial well-being.

According to CommonBond’s data, employees in the finance industry are not as affected by student debt as those in other industries, with 43% of respondents currently having student loans taken out to fund their own educations. Of those with student debt, 46% borrowed $50,000 or more in student loans for their educations. More notably, 5% of those with student debt took $150,000 or more to fund their educations. Finally, only about 35% of automotive/manufacturing employees surveyed currently have student debt from their own educations. This finding made the automotive and manufacturing industry the least impacted by student debt.

Client Service May 8, 2018

DC Plan Industry Still Falls Short on Distribution Options

Looking across today’s DC plan marketplace, researchers suggest it is still much more common to see plan designs that are tailored to drive retired or terminated participants out of the plan.

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Because individuals’ financial needs in retirement can vary over time and from one person to another, it is crucially important that a defined contribution (DC) plan offer an array of retirement income and distribution options, according to the latest research from the Defined Contribution Institutional Investment Association (DCIIA).

According to “Design Matters: Plan Distribution Options,” DC plan sponsors are increasingly concerned about effectively providing participants with the retirement income flexibility they need and want after separation from active service. However, they face uncertainty about what are the best approaches. 

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The analysis was put together by an impressive list of retirement industry analysts: Jessica Sclafani, Cerulli Associates; Rennie Worsfold, Financial Engines; Doug Keith, GMO; Elizabeth Heffernan, Hueler Income Solutions; Cynthia Mallett, MetLife; Jim Smith, Morningstar; Mark Fortier, NISA Investment Advisors; Don Stone, Pavilion Advisory Group; Tom Johnson, Retirement Clearinghouse; Jody Strakosch, Strakosch Retirement Strategies; Rachel Weker, T. Rowe Price Associates; Mark Foley, TIAA; Kate Jonas, Nuveen; and Don Stroube, Wells Fargo.

Combining insights from these various providers and research organizations, DCIIA’s report argues that plan sponsors must better evaluate their plans’ objectives with respect to retired and separated participants—and then determine if the plans’ retirement income and distribution options align with these objectives. This may sound like a straightforward task, but as the research lays out, setting plan objectives remains one of the most challenging tasks that plan officials face, let alone the issue of pursuing these objectives effectively over time.

“A pivotal question for sponsors to answer is whether they want their plans to encourage plan participation to continue through retirement, or rather, to actively encourage distribution of assets once active service separation has occurred, either as a result of a job change or retirement,” the researchers suggest. “Plan sponsors’ decisions about their plans’ distribution policy can play a critical role in their participants’ retirement outcomes.”

Looking across today’s DC plan marketplace, the researchers suggest it is much more common to see plan designs that are tailored to drive retired or terminated participants out of the plan. These plans generally only provide one or a few types of single lump-sum options, such as cash-outs, direct rollovers to another employer’s DC plan, or direct rollover to an individual retirement account (IRA) or rollover annuity. On DCIIA’s analysis, all of these options “align much more with plan sponsors’ desire for separated participants to exit the plan.”

The DCIIA research suggests options that encourage participants to remain in-plan are only “moderately prevalent,” if even that. Partial withdrawals, for example, are seen by DCIIA as “retiree friendly” but they are still not very widespread. Qualified in-plan annuities are even less prevalent, though they are also viewed as “retiree friendly” in terms of keeping participants in-plan once they terminate.

While the industry has a long way to go before it is as effective at promoting rational decumulation as it is at promoting asset accumulation, DCIIA finds some emerging evidence that “plan sponsors, consultants and advisers are beginning to reconsider whether guiding participants towards lump-sum distributions, intentionally or unintentionally, through plan designs that encourage such distributions, is the most appropriate approach.”

“Increasingly, plan sponsors have begun to realize that options such as periodic partial withdrawals, partial annuitization, monthly/quarterly installment payments and other flexible distribution strategies can allow retired and other separated participants to readily turn their account balances into the type of income stream that best meets their individual financial needs,” the report says. “In short, they realize plan design (in this case, the distribution options available to participants, and the framing of those options) matters.”

The research indicates that when DC plans offer distribution options alongside a one-time lump-sum benefit payment, a good number of retiring plan participants are interested in, and take advantage, of these options. For instance, among the approximately 20% of Vanguard plans that permitted partial distributions, simply offering them produced notably different participant behavior. About 30% more participants and 50% more assets remained in the employer plan when partial distributions were allowed.

As researchers point out, today most retirement-age participants and their plan assets leave the employer-sponsored qualified plan system over time, “but this termination behavior associated with lump sum payouts seems linked to plan rules that inhibit ad hoc or flexible withdrawals from DC plans.” Importantly, researchers conclude, allowing participants the flexibility to remain in the employer-based retirement framework can have significant benefits, not only for plan participants, but also for plan sponsors.

“Retirees who elect to stay in the plan or who return to employment benefit from the plan’s fiduciary standard of care, and maintain access to cost-effective, institutional investment offerings, often at lower cost than what is available to them in the retail marketplace,” the research highlights. “Moreover, all participants in the plan—no matter their age or how far from retirement they are—can benefit from increased economies of scale due to more participants remaining in the plan, which can further lower costs for everyone.”

At the same time, DCIIA says, plan sponsors serving as fiduciaries also benefit from providing their plan participants access to lower fees that result from the greater asset levels.

The full analysis can be downloaded here.

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