403(b) Plans Get Lifetime Income, Help With Education Expenses Right

Student loan debt skyrocketed in the past decade, topping $1.5 trillion among millions of Americans. The crisis has prompted U.S. employers to address it in their benefits programs.

Offering help with the cost of higher education can assist in reducing the amount of student loan debt individuals have.

An analysis of the 403(b) plans industry report from the PLANSPONSOR 2019 Defined Contribution (DC) Survey suggests these plan sponsors, more so than defined contribution (DC) plan sponsors overall, are stepping up to aid employees with education expenses, an important component of financial wellness.

More than two in 10 403(b) plan sponsors (21.3%) offer payroll deductions to a 529 college savings plan, versus 8.7% of respondents overall. Seven percent provide tuition assistance (i.e., an employer contribution to a 529 plan), compared with 3% of DC plans overall. Sixty percent offer a tuition reimbursement program, versus 47.8% of respondents overall.

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And 8.5% offer a student loan repayment/reimbursement program, compared with 3.2% of DC plans overall.

More than two in 10 (21.7%) provide formal education/guidance to participants about managing student loan debt, compared with less than 14.7% of DC plan sponsors overall. More than one-quarter (27.2%) offer formal education/guidance about saving for college, versus 22.8% of respondents overall.

Retirement plan sponsors recognize that participants who take loans from their plan accounts to address financial issues such as paying for college education face a potentially large setback to their retirement savings. According to a Deloitte study, a typical borrower who defaults on his loan because of separation of service could lose $300,000 in retirement savings over his career.

The 2019 PLANSPONSOR DC Survey finds 403(b) plan sponsors are ahead of the game in protecting plan participants from this setback as well. Nearly half (49%) are allowing or said they would soon be allowing separated employees to continue to make loan repayments after termination. Less than one-third (32.5%) of respondents overall said the same.

Providing Lifetime Income

Concerned about participants’ retirement readiness and longevity, more plan sponsors are adopting lifetime income solutions, according to the 2019 Lifetime Income Solutions Survey by Willis Towers Watson.

Most are offering systematic withdrawals, lifetime education and planning tools, and in-plan managed account services. The Willis Towers Watson survey suggests plan sponsors are still leery of offering guaranteed income solutions such as annuities.

But 403(b) plans have a history of being a source of lifetime income for participants.

According to the most recent PLANSPONSOR DC Survey, two-thirds of 403(b) plans offer systematic withdrawals to retiring participants, compared with 44.3% of respondents overall. One-third provide in-plan insurance-based products that guarantee monthly future income, versus 9.2% of respondents overall, and 8.6% offer an out-of-plan annuity purchase/bidding service, versus 5.2%.

Thirty-four percent offer an in-plan managed account solution that also helps with retirement income, and 26.4% provide in-plan managed payout fund(s) (i.e., traditional mutual funds offering monthly, non-guaranteed income). These solutions are offered by 24.4% and 10%, respectively, of DC plans overall.

Results may be different in the future as the Setting Every Community Up for Retirement Enhancement (SECURE) Act includes several provisions related to lifetime income.

PLANSPONSOR 2019 DC Survey industry reports may be purchased by contacting Brian O’Keefe at brian.okeefe@issmediasolutions.com.