Plan Sponsors: Act Now to Link Student Loan Forgiveness and Retirement

Alight Solutions is urging plan sponsors to champion the idea that participants should allocate any additional income released from student loan forgiveness to their retirement accounts.

The Alight Solutions 2021 Employee Wellbeing Mindset Study found that 70% of workers under age 40 with student loan debt say that student loans have significantly or somewhat impacted their ability to save for the future. The report also showed that 23% of respondents say that their level of debt is ruining their quality of life.

Illustrating the growth of a dollar deferred and invested to retirement is one way to tackle this. Considering the executive order from President Joe Biden, Alight took a fresh look at how income could affect retirement savings. 

Earlier this month, President Biden announced that the Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education and up to $10,000 in debt cancellation to non-Pell-grant recipients.  

“The additional income that participants may be able to gain from the Student Loan Forgiveness Plan could help change this,” according to Alight. “For example, if an employee at age 25 started saving $100 a month, then by the age of 65 they would have almost an additional $300,000 in savings. Specifically, that would be $48,000 more money actually saved, but more importantly nearly an additional $250,000 in just interest income.”

Plan sponsors have several tactics available to help provide workers with a clear understanding for how to best allocate the additional funds and connect student loan cancellation with retirement savings. And the federal student loan forgiveness program presents a window for plan sponsors to urge workers with student loan debt to boost their retirement plan contributions, says Virginia Maguire, vice president of wealth solutions and strategy at Alight Solutions.

“While long-term savings planning is seemingly financial in nature, it really spans across an employees’ broader well-being,” she says. “For instance, our studies show that 43% of employees reduced or stopped saving for the future (for retirement or other goals) in order to pay for health care costs.”

Alight favors plan sponsors use tactics such as personalized engagement and messaging to urge plan participants to act to increase their contributions.

Employers can tie 401(k) and health savings account messages via applications, online experiences and email specifically to loan forgiveness, with examples—like above— that illustrate the time value of money, through appropriate demographic channels used by them and images resonant with a younger and diverse cohort.

Another technique for plan sponsors to engage users is to enable access to unbiased outside of the firm advisers and experts to help workers.   

“Having live trained experts available to discuss different savings opportunities across all their benefits (401(k), [health savings account, health care, etc) who are acting solely in the best interest of that employee is incredibly valuable,” adds Maguire.

Another tactic for plan sponsors to assist is to offer paycheck savings planners and financial well-being tools: “Provide digital tools that span multiple benefits/savings vehicles that help employees deal with their entire paycheck and their entire benefit lineup,” says Maguire.  

Employers are looking to help workers with financial stress and options to increase well-being at the workplace are desired by workers and plan sponsors, she adds.  

“With employers’ continued desire to drive optimal well-being support and utilization, they may be best positioned to provide employees who qualify for the Student Loan Forgiveness Plan with personalized guidance around how to best allocate these additional dollars toward long-term savings,” she says.

While many retirement plan participants are saddled by student loan debt that is preventing their saving and investing for retirement, many are comfortable sharing personal information on their financial situation, adds Maguire.   

“The good news is that between 70-80% of Gen Z and Millennials report they are comfortable with sharing personal financial information with employers to gain personalized guidance via messaging, tools, and live advisers,” she says.