Education Savings Benefits Gain Momentum as Employees Struggle With Student Debt

As loan repayments are an obstacle limiting employees retirement savings, education savings benefits are an opportunity for employers to relieve participants’ financial stress and help them save.

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.  

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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.  

Insurance Broker’s PEP Launches for Private Equity, Venture Portfolio Firms

San Francisco-based Woodruff Sawyer enters the pooled employer plan market, seeking to attract startup plans through the firm’s private equity and venture capital resources.

Insurance broker Woodruff-Sawyer & Co. Inc. launched the firm’s first pooled employer retirement plan on February 6, focused on attracting private equity and venture capital portfolio companies.

Woodruff Sawyer is targeting startups because many technology companies experience high personal and ownership turnover, says Kristina Keck, vice president and practice leader of retirement plan services at the San Francisco-based insurance broker.

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“We have a private equity and venture capital presence, and those resources bring a lot of startup plans to us, and they’re difficult to run [because] they don’t always [last],” due to high turnover of both employees and ownership, explains Keck. At some startup companies, “there’s a revolving door … for the CFO and for some of those fiduciaries because they’re all looking for [their next] opportunities.”

Pooled employer plans are retirement plans that allow unrelated businesses to all participate in one aggregated plan.

 

PEP Target Market: VC

Individuals who operate retirement plans at startup companies have many tasks to execute, as the firms often experience significant turnover, leaving little time to focus on fiduciary responsibility. For example, one technology company working with Woodruff has named three different chief financial officers in the last five years, she explains. Those plans may then suffer from inadequate fiduciary oversight, elevating the plan’s vulnerability to a lawsuit, says Keck.

“There’s not consistency of the fiduciary being involved in the plan, and so the PEP solves some of that problem, because we have the consistency with the pooled plan provider and with our team,” Keck says. Using a PEP “creates that consistency from a fiduciary perspective, because you’ve got people that are there fixed in place.”

In addition to supporting an employer to ensure its plan meets  Employee Retirement Income Security Act fiduciary responsibility, a PEP may offer practical advantages for private equity general partners in connection with transactions, according to a 2022 post from law firm Ropes & Gray.

For private equity plan sponsors on the buy side of a transaction, PEPs can: offer advantages in implementation time; provide a plan to employees who were joined to a firm and acquired by carveouts following a merger or acquisition; lower participant fees; use fewer internal benefit and HR resources; and serve as an alternative solution, instead of absorbing or purchasing an existing retirement plan with outstanding compliance or ligation concerns.

Price Concerns

Every plan sponsor considering joining the PEP is shown a custom price prior to joining, Keck says, who adds Woodruff’s “perfect” target market is sponsors with plan assets totaling less than $50 million.

When sponsors join a PEP, they delegate their named fiduciary role to a third-party pooled plan provider. “We wanted to be able to work with these smaller plans in a way that’s efficient for them from a cost perspective, and it’s efficient for us on an administrative perspective,” she says.

Nevertheless, the PEP pitch to clients is not concentrated on cost savings, according to Keck: Although some sponsors will be able to lower retirement plan costs with the PEP, not every sponsor will reduce its 401(k) expenses.

Brass Tacks

Woodruff Sawyer partnered with recordkeeper Empower to launch the PEP; third-party pensions consultant the Finway Group is the pooled plan provider. The plan is using Capital Group’s American Funds to offer a hybrid target-date fund and make available collective investment trusts.

For the PEP platform, Woodruff Sawyer will provide 3(38) investment manager fiduciary services and 3(21) coverage to sponsors; the Finway Group is the 3(16) third-party plan administrator.  

Woodruff has just started sharing the proposal with clients, according to a Woodruff representative, so it is still lining up the initial participants.

Pace of PEPs 

PEPs were introduced by the Setting Every Community Up for Retirement Enhancement Act of 2019 and expanded by the Secure 2.0 Act of 2022. 

PEPs allow business owners and employees to save up to the same amount per year, and earn the same tax advantages, as they would with a traditional retirement plan. As with a traditional employer-run plan, employees can earn matching contributions from their employer.

There were approximately 380 PEPs (up from 350 mid-year) and 130 pooled plan providers registered with the Department of Labor at the beginning of January, according to Robb Smith, president of RS Fiduciary Solutions, PEP-HUB and PEP-RFP.

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