Bobby Matson is founder/CEO at Payitoff, automated debt guidance tools and debt APIs that get borrowers better outcomes.
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Shortly before the end of 2022, an otherwise gridlocked Congress passed a bipartisan piece of legislation that will have far-reaching effects on American workers and their employers, specifically regarding their retirement savings plans.
Like its predecessor, the SECURE Act 2.0—an update to 2019’s SECURE Act—was designed to encourage more retirement savings. It opens more avenues for Americans to better set themselves up for retirement, no matter their current financial situation. The update includes automatic enrollment for newly created employer-sponsored retirement plans, eligibility for part-time workers to receive retirement benefits, changes to required minimum distributions and more.
Perhaps the most significant change, however, is that starting in 2024, employers will be able to make matching contributions to retirement accounts based on an employee’s student loan payments. That means businesses can now match their staff’s student loan payments with a retirement contribution under their employer-sponsored retirement account.
The Impact On Student Loan Borrowers
This minor change may prove itself a game changer for a generation of borrowers who often prioritize their student loan debt repayment ahead of saving for retirement. The average cost of attending a four-year college (tuition, room and board, and fees) skyrocketed by 169% between 1980 and 2020, according to a study conducted by Georgetown University Center on Education and the Workforce.
According to College Board, the average borrower took on $29,100 in debt to pursue a bachelor’s degree in 2020-2021. Today, over 45 million American borrowers owe a combined $1.6 trillion. It can be difficult for graduates to start saving for retirement while paying off their student loans. In fact, more than 1 in 5 borrowers see their loan balance increase in the first five years. As a result, 79% of borrowers say that student debt reduces their ability to save for retirement.
While the Biden Administration’s Student Loan Relief program was introduced in late 2022 to help ease some of the financial burdens of higher education, those efforts remain tied up in court, with no end in sight.
That means that, at present and for the foreseeable future, most employees with student loan debts are unable to take advantage of employer retirement savings programs or need to limit their contributions until they’ve paid off their student loans.
What This Means For Employers
While this provision of the new and improved SECURE Act is still a year from being implemented, employers would be wise to familiarize themselves with the changes sooner than later, as they also stand to gain from the new legislation. That is because it offers them one more avenue for attracting and retaining talent in a historically tight labor market, while simultaneously reducing their tax burden.
According to Bureau of Labor Statistics data, the U.S. unemployment rate was just 3.6% in February. With twice as many job openings as there are available workers in America, employers will need every edge they can get in the ongoing war for talent.
The SECURE Act 2.0 gives them an opportunity to stand out in a crowded marketplace by being an early adopter when the legislation goes into effect in 2024. I expect that unless the employment market makes a dramatic turn in the employers’ favor, it won’t be long before retirement contributions made for student loan repayments is a standard employee benefit.
Getting Started
Employers can start to act on this legislation by asking their current 401(k) plan provider or recordkeeper about their options for offering the SECURE 2.0 student loan provision. It’s important they make sure to have an automated system in place to track student loan payments so they can properly monitor matching 401(k) contributions that employees with student loans would have missed out on otherwise.
If their 401(k) provider does not support a student loan matching feature, employers can meet directly with technology providers that can offer reliable student loan data to help facilitate this option within a company’s existing benefits structure. Benefits providers need the ability to track a borrower’s student loan accounts, real-time balances and payment history to stay compliant with SECURE 2.0 requirements.
Employers just starting to explore the student loan world have several approaches to consider, such as “lightweight” student loan tools that offer some services for free while charging for others, SECURE 2.0 compliant solutions and full-blown student loan contribution models, where employers contribute directly toward their employees’ student loans. Employers can also consider point solutions that offer student loan benefits.
No matter what approach they take, with these changes employers can expect overall enrollments and contributions to increase dramatically in the years ahead, offering a vital resource to the millions of student loan borrowers who have historically struggled to plan and save for retirement. The result is a much healthier financial outcome for the average employee and a more durable workforce long-term.
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