Benefits August 16, 2019

Options for Providing Student Loan Repayment Benefits Increasing

Paying off student loan debt helps employees be able to save for retirement—some benefits allow for both at the same time—and more options for providing this benefit have been introduced.
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Art by James Yang

Student loan debt continues to climb, yet few plan sponsors are offering features to mitigate—or at least assist with—the cost. 

Even as a recent TIAA-MIT AgeLab study finds 73% of student loan borrowers delay maximizing retirement savings to pay off their debts, the 2019 PLANSPONSOR Defined Contribution (DC) survey reports only 2.6% of employers are offering student loan repayment or reimbursement programs to assist with higher or continuing education costs. The highest number—49.7% of employers—said they do not offer any assistance with higher education expenses.

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This absence of student loan features is troubling, and as more and more employees are postponing major life changes—from purchasing property to starting a family—to quiet their debt, according to a 2019 Mercer report, the need for student loan benefits is ever-growing. The study argues that providing these types of programs can be key to attracting and retaining a workforce.

So, it comes as no surprise that the growing number of student debt across the United States, at $1.7 trillion, has bumped student loan features to one of the highest sought out benefits by employees, says a 2019 Mercer report. Pending legislation is targeting the nationwide issue, one being the Employer Participation in Repayment Act bill, which permits employers to contribute up to $5,250 tax-free to an employees’ student loans. Another bill, reintroduced at the end of 2018, would allow employers to match contributions to their workers’ 401(k) or 403(b) accounts, as if student loan payments were salary reduction contributions.

As plan sponsors see an amplified popularity in these programs, some are planning to provide new features to their employees during the 2019 open enrollment period, says a survey by Employee Benefit Adviser.

“Student loan programs are trending right now, but they still rank the lowest among the benefits companies currently provide, because they are a newer benefit,” says Allison Wendelberger, national sales director at Voluntary Benefit Advisors (VBA), in the survey. “Advisers should be going to their clients and saying, ‘Hey, a lot of companies are starting to offer student loan assistance, and I think it would be a wise thing for you to look at this.’ It’ll be interesting to see where it ranks five years from now.”

Neil Lloyd, head of U.S. Defined Contribution and Financial Wellness at Mercer, says plan sponsors concerned with the costs of offering a student loan repayment program can look to refinancing or 401(k) matching. Refinancing allows employers to add a credit to the loan account and establish new repayment terms and better interest rates for borrowers, whereas student loan 401(k) matching authorizes plan sponsors to match an employee’s student loan contributions, and instead, apply it to the worker’s 401(k) account. However, Lloyd says matching dollars into a 401(k) account can become quite difficult if an employee pays off their student loans aggressively.

In 2018, the IRS released a Private Letter Ruling, approving student loan repayment (SLR) non-elective contributions. Plan sponsors could amend their 401(k) plans to offer student loan benefit programs, in which the employer would add a non-elective contribution on behalf of an employee, as long as the employee is contributing to their SLR non-elective contribution. So while the Private Letter Ruling was directed only to the taxpayer—in this case, the plan sponsor—who requested the program, this does give employers a hint at where the IRS stands and what could be permitted for their workforce.

Another option employers have are student loan direct payment platforms, where plan sponsors will agree to make a payment towards a student loan for a fixed period. Yet, most employers dislike the payment platforms on the basis that it is taxable to workers, and costly, too.

“When you offer a refinancing program, it doesn’t cost much. But with student loan direct payments, you might need to get a budget approved,” Lloyd says.

While the above options are current selections for plan sponsors today, Thompson encourages employers to access their workforces and understand what type of benefit or feature could be best for them.

“One thing that is true across all employers, is that all have a unique plan design,” he says. “There is something that each of them do that is unique for their workforce.”

New approaches to student debt benefits

At Tuition.io, plan sponsor clients are already introducing innovative approaches to student loan repayment benefits. Recently, the firm partnered with Montefiore St. Luke’s Cornwall (MSLC) on a benefit allowing employees to convert paid time off (PTO) days to student loan repayment dollars.

“We were already talking about student loan benefits, and we started wondering, ‘What would you think about letting employees use their PTO days?’” says Scott Thompson, CEO of Tuition.io. “If these employees use this opportunity to contribute as much as they can, they can seriously downsize their payments over a period of time.”

As part of the program with MSLC, eligible employees have two days every year to exchange 30 to 75 hours of PTO towards student debt, including any federal or Parent PLUS loans, at a maximum of $5,000 annually. Where fees can typically discourage plan sponsors from offering student loan repayment programs in the first place, PTO days are already paid for by the sponsoring company, so employers don’t have to worry about costs.

“As you accrue PTO, it’s expensed by your employer. [The employer] is not taking additional cost to administer this benefit; you’re just allowing the individual to use it this way,” explains Thompson.

The program, Thompson says, advances the PTO feature to include parents. Parent employees and their children can register an account on Tuition.io, and if they have unused PTO, can qualify to utilize those days towards student loans. Even grandchildren can benefit from the feature, says Thompson.

eduassist.me launched a new business model and software platform to help companies take care of their lower- to mid-paid employees to relieve them of Federal student loan default and/or enroll them into affordable Income-based Repayment programs, as low as $0/month.

“What sets us apart is our core mission to help change lives with a faster, more dramatic, cost-effective solution instead of just making extra payments towards a student loan or shaving off a few dollars a month with a loan refinance”, said Lois Preister, head of the Loan Processing Department at Carlsbad, CA-based eduassist.me. “Our unique philosophy is not to pay off the loans faster, but to immediately help reduce loan payments, as much as possible, so that the balance is forgiven with Federal programs.”

Default borrowers are charged an 18% penalty, hundreds or thousands of dollars in collection fees are added, and a very damaging rating on their credit reports. By assisting people to get out of default and/or enrolling into a minimal payment, it can be a life-changing and life-long solution to free employees of the trap of student loan default.

Student loan default isn’t just a “Millennial problem” it’s everyone across the board in their 40’s and 50’s, for themselves, and/or Parent Plus loans for their kids, eduassist.me says.

Retirement planning and investing firm FOCUS4Financial (F4F) has teamed up with Thrive Flexible Matching to offer a new employee student loan repayment benefit.

The Thrive Flexible Matching student loan debt solution looks to combine an employee’s contribution and employer match from the company’s 401(k) or 403(b) plan, allowing eligible employees to reallocate shares of their retirement planning contribution and company match towards their student loan debt, according to F4F. Once adopted, workers can control how their retirement funds and company match are allocated, either exclusively towards their retirement savings or student loan debt, or a combination of both.

Offering programs, features, and even education to address student loan debt can benefit the workforce, the plan, and the employer.  “If it helps them to be in a better place financially, incentivize the employees to use it,” Thompson states. “It’s good from every direction. Good for the employer, good for the employee, and for the big issue of student loan debt.”
Investing August 14, 2019

LDI 2.0

Defined benefit plan sponsors are branching out from the traditional equity/bond liability-driven investing (LDI) portfolio, adding diversification as well as addressing short-term cash flow needs.
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Art by Wesley Allsbrook
Traditional liability-driven investing (LDI) for defined benefit (DB) plans involved moving assets from equities to fixed income—usually bonds—as the funded status of the plan grew. The idea was to preserve the funded status that was reached while trying to continue to improve it with return generating investment vehicles.

However, Conning’s Annual Pension Review 2018 found that in the last few years, most of the shift out of equities was a move to asset classes other than fixed income. The report says, “A large part of the equity drawdown has been reinvested in alternatives and real assets, with smaller plans leading the charge.”

Sean Kurian, a managing director and head of institutional solutions at Conning, based in New York City, says it’s not that LDI is lacking, but plan sponsors are evolving in their understanding from “LDI 1.0,” as he calls it. “There’s a better appreciation of risk in interest rates and what plan sponsors can invest in to get a better match of assets and liabilities,” he says.

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Kurian explains that for a DB plan to get out of a deficit, there are only two ways: make contributions to the plan or get returns. By investing in alternatives and real assets, plan sponsors can increase diversification. Just investing in equities is a concentrated risk position.

“A sophisticated hedge fund strategy or private equity investment may outperform traditional equities,” he says. “The way we think about portfolio construction for pension plans is to have a hedge portfolio focused on managing liability risk, then have a return-seeking portion that creates excess returns vs liabilities—just don’t put all your eggs in one basket.”

Kurian adds that diversification means the overall return seeking portion of the portfolio may be more profitable; however, it may just mean a 5% or 10% move from traditional equity. It’s not a large allocation shift on an individual plan-by-plan basis.

Chris McGoldrick, head of defined benefit delegated investment solutions at Willis Towers Watson, based in Philadelphia, agrees that it’s not that “LDI 1.0” is not working, it is just not working as efficiently as it could, driving plan sponsors to be quick to move to respond to changing market conditions.

Willis Towers Watson advocates for a “total portfolio strategy”—instead of thinking about each asset class separately, think about how they work together. Plan sponsors should think about the interplay between asset return and hedging to maximize outcomes

Like Kurian, McGoldrick says this means more diversification. “In the return seeking part of the portfolio, investors think if they diversify between equity managers, they are diversified,” he says. “But, they need to think about other asset classes—high yield bank loans, credit, real estate investment trusts (REITs), infrastructure, hedge funds and alternative beta hedge fund type strategies.” McGoldrick adds that these asset types are not as correlated with the equity market or corporate growth and will perform well in different markets.

“On the fixed income side, it depends on the DB plan’s liability and how well-funded it is,” McGoldrick says. “Plan sponsors should think about more than high credit bonds. They should be more efficient and think about government exposures or Treasury Separate Trading of Registered Interest and Principal of Securities (STRIPs).”

A Willis Towers Watson Insights article says, “For plan sponsors, the acceptable range of portfolio outcomes, and consequently the appropriate sizing of various return drivers, is a function of plan characteristics and objectives. A fully funded, frozen plan considering annuitization in the near term will have a lower return objective and will need less exposure to return drivers with greater variability than a poorly funded plan attempting to close a deficit over the long term. The shorter the time horizon, or the lower the return objective, the greater the need for diversification.”

According to McGoldrick, “Another thing to keep in mind is a plan’s changing liability profile. It will change over time as retirees start getting payouts. Plan sponsors need a strategy to adjust to that, and it has to be done in a risk-controlled way to avoid surprises”

That’s why Kurian warns that DB plan sponsors have to be careful to not overload on return-seeking investments because they also don’t want to be a seller in a bad market when they need liquidity to pay retirees. However, he notes that while liquidity needs will increase as retirees withdraw, plans may not have a large liquidity need if they structure their hedging portfolios more directly against liability cashflows.

According to Jeff Whitehead, head of client investment solutions at Aegon, based in Cedar Rapids, Iowa, with many pension plans facing the challenge of meeting regular cash flow requirements, cash flow-driven investing (CDI) is growing in popularity. He explains that CDI is an investment approach focused on delivering a consistent, reliable stream of cash flow to meet the obligations of an organization and plan sponsors may want to consider a CDI solution to meet short-term cash flow needs.

“For plan sponsors, the need is the same: a programmatic and systematic approach to meet current and future liabilities,” Whitehead says. “However, different cash flow needs require tailored cash flow solutions and cash flow-driven investing is an option because it is highly customized.” He explains that no two CDI portfolios should be identical, and each CDI portfolio can be tailored to specific circumstances, taking into consideration cash-flow predictability, expected contributions, risk tolerance, liquidity needs, tax considerations and the overall objective of the portfolio.

According to Whitehead, the best use of CDI for corporate plans is in conjunction with LDI. He says, especially for plans approaching fully funded status—whether the plan sponsor intends to keep the plan in hibernation or is ultimately planning for a full risk transfer—plan sponsors need to focus on the plan’s funded status and having CDI on the front end can be helpful.

“I think CDI works for other plans as well, especially for public funds or multiemployer plans, church plans, hospitals—any plan that doesn’t discount at the AA rate. Many of these plans are not as well-funded and tend to focus more on their expected return on assets,” he adds.

CDI creates enough cash flow month-by-month or quarter-by-quarter to fund expected outflows so investment committees don’t have to do that every quarter or whenever they meet. Whitehead explains that with CDI, a laddered portfolio is created to provide cash flows that mature at the right times to meet outflows. “You’re trying to have the right amount of money every month or quarter so payments can be paid without ever having to sell assets,” he says.

“DB plan sponsors don’t want to be a forced seller in a chaotic market. If they use CDI, they decide when to sell assets. They can sell stocks when they desire,” Whitehead adds.

CDI can be tailored to different situations. For example, if a plan has far more retirees than active or terminated, vested participants, it is more cash flow negative needs more money. Other plans may not need as much.

In conjunction with LDI, CDI is part of the fixed income allocation. Whitehead explains that the more CDI plan sponsors use, the more duration they will have to get from the LDI portfolio to match liabilities. For example, if the liability duration of the plan is 12 years and the plan sponsor uses a portion of the fixed income allocation for CDI, it will have to use longer duration vehicles to match the 12 years.

“LDI continues to evolve, and after the financial crisis [of 2008/2009], most thought of using long duration bonds to hedge interest rates. Through the years, DB plans have become more sophisticated and better-funded, and plan sponsors realize there are better ways to hedge,” Whitehead says. “CDI is another step along the journey that makes matching liabilities better. CDI in conjunction with LDI matches short-term cash flow needs while maintaining protection for needs further out.”

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