Education Savings Benefits Gain Momentum as Employees Struggle With Student Debt

Not only does mounting student loan debt serve as a financial burden to many retirement plan participants, but it also impacts their ability to save for retirement. 

According to Vestwell’s “2024 Retirement Industry Trends Report,” which surveyed 1,200 U.S. employees, 93% of those with student loans say their student debt has affected their ability to save for retirement.  

The resumption of student loan payments in October 2023, after a three-year pandemic pause, has likely exacerbated the financial pressure many are now facing, Vestwell stated in its report. 

The Employee Benefit Research Institute and J.P. Morgan Chase Asset Management also analyzed 401(k) plan recordkeeper data on balances and contributions of active participants, linked with banking data from the same participants. The three-year-long study found average retirement account balances were lower for those who made student loan payments than for those who did not. The differences were particularly pronounced among participants with incomes of at least $55,000. 

For example, among employees with tenure ranging from five through 12 years, the average retirement account balance for participants who made student loan payments was $86,109, as compared with $107,687 for those who did not make payments.  

According to EBRI, of the participants who were making student debt payments at the beginning of the study period and had stopped by the end, 31.6% increased their retirement plan contribution rate at least one percentage point after the loan payments had stopped. As a whole, making student loan payments was found to have a “statistically significant negative impact” on both the average employee contribution and account balance at the end of the study. 

However, EBRI found that some of the impact of student loan payments appeared to be “muted” by the existence of employer contributions and the default contribution rates in plans using automatic enrollment, as the median employee contribution rate for all participants was near the level of the maximum amount matched and/or common default rates. 

The Vestwell study also found that employer-sponsored education saving benefits are gaining momentum and that 74% of employees with student loans agree they would be more likely to continue working for an employer that offered student loan-related benefits. 

In addition to offering a student loan matching benefit, now available under the SECURE 2.0 Act of 2022, Vestwell argued that 529 education savings accounts are an opportunity for employers and advisers to provide tax-advantaged savings plans for employees’ future education costs.  

Meanwhile, many employees are unaware of the benefits of 529 accounts, as only 5% of those surveyed with a 401(k) on the Vestwell platform currently have a 529 account, and 42% said they are at least somewhat aware of the tax benefits of these accounts.  

The accounts, which enable tax-deferred savings and investment for higher education costs, are gaining momentum, though, as an estimated $2.1 billion in net assets went into the plans in the fourth quarter of 2023, bringing the total market to 16.4 million accounts with $471 billion in assets, according to data from ISS Market Intelligence, which, like PLANSPONSOR, is owned by ISS STOXX.  

Researchers at EBRI argued that the SECURE 2.0 matching provision would help participants who repay loans receive the full company match so they can build up assets for retirement. However, the researchers pointed out that the feature could have the unintended consequence of lowering the contributions of some who are already contributing.  

Respondents to Vestwell’s survey expressed a desire to invest more in retirement savings. But the survey results demonstrated a clear gap between participants’ current deferral rates and their perceived ideal savings rates. For example, while 62% of participants said they believe they should defer 10% or more of their salary to retire comfortably, only 34% of savers actually contribute to that degree. 

Earning a higher salary and qualifying for an employer match were identified as “key motivators” for respondents to increase their retirement savings, Vestwell found.