The Supreme Court Friday ruled, in a 6-3 decision, against President Joe Biden’s student debt relief program. The debt relief would have forgiven $10,000 for non-Pell Grant recipients and $20,000 for Pell Grant recipients if they were earning less than $125,000 a year. The order would have forgiven approximately $430 billion in student debt.
The Supreme Court ruled that the Biden Administration exceeded its authority under the HEROES Act, a federal law first enacted in response to the Sept. 11 terrorist attacks, to “waive or modify” legal provisions related to student loans.
The Court held that “The Secretary’s power under the Act to ‘modify’ does not permit ‘basic and fundamental changes in the scheme’ designed by Congress.” Nor can the Administration claim they are waiving the debt because “the Secretary’s invocation of the waiver power here does not remotely resemble how it has been used on prior occasions, where it was simply used to nullify particular legal requirements.”
Other elements of the debt relief program that were not struck down, but are still hugely significant for borrowers, were finalized on Friday. Student loan borrowers’ monthly minimum payments will now be capped at 5% of discretionary income, down from 10%. The formula for calculating “discretionary income” was also changed for this purpose. It is now measured at 225% of the federal poverty line, up from 150%. This means that the minimum payments for many borrowers, especially for the more indebted, will be reduced.
Secondly, balances older than ten years will be forgiven, provided the original balance was $12,000 or less. This has been reduced from balances older than 20 years.
The interest on student loans will resume accruing on September 1, and the first repayments will come due in October. Biden cannot extend the debt accrual and repayment pause because of the debt ceiling budget deal he reached with House Speaker Kevin McCarthy in May.
Biden did however create an “on ramp” for the resumption of payments. Though interest will begin to accrue this September, the Department of Education will not send late or missed payment information to credit agencies for payments due until September 2024.
Employers interested in overall financial wellness and financial education can highlight some of this news to their participants to assist them in their financial planning, as well helping to address anxiety employees may be experiencing about the accrual and repayment resumptions. The debt forgiveness elements that the Supreme Court rejected have received more headlines than those that remain.
The SECURE 2.0 Act of 2022 also permits retirement plan sponsors to match, with contributions to a defined contribution plan, participants’ student loan repayments starting in 2024. The date at which sponsors can start providing this benefit is all but certain to be later than January 1, 2024, when it is legally permitted. The IRS and Department of Labor have yet to issue regulatory guidance on this measure, and many sources say it is unclear if recordkeepers will be prepared to support it for sponsors on their platforms.
The Retirement Income ‘Low-Hanging Fruit’ Option Open to Plan Sponsors
Plan sponsors and their retirement industry providers can take steps toward facilitating greater coordination and use of systematic withdrawals by plan participants.
Retirement income solutions have started to mature, yet many plan sponsors remain in the planning stage for incorporating into retirement plans options for participants to spend down their account balances or preserve and grow assets. Work is still needed to help participants access retirement income via both insured products and nonguaranteed lifetime income options.
Plan participants at MRIGlobal, a nonprofit scientific research institute in Kansas City, Missouri, can use systematic withdrawals from their accumulated 403(b) plan account balances, coordinating with the recordkeeper Empower, says Monica De Agostino, MRIGlobal’s human resources manager.
“Empower offers [MRIGlobal] retiring employees a range of choices,” she says. “One option is periodic payments, where retirees can receive regular payments based on the frequency they prefer. This could be on a monthly, quarterly, semiannual or annual basis.”
For retirement income, MRIGolobal also offers participants an in-plan managed account service, as of 2022. Plan participants also have the option of working with a financial adviser through benefits specialist CBIZ Inc., De Agostino adds.
“To help retiring employees figure out their retirement income strategies, we always recommend that they consult with their financial adviser or connect with an Empower retirement consultant to provide personalized advice based on each retiree’s unique circumstances,” she says. “They can explore various retirement income options that fit their needs.”
Retirement Income Thinking
One plan-design option available to sponsors to help participants create a paycheck in retirement is adoption of systematic withdrawals. But this option requires greater coordination between disparate retirement ecosystem partners to make it work.
“One reason [for] systematic withdrawals … being the low-hanging fruit option [available for retirement plans] is that it comes [down] to the collaboration of all the players, and that goes for all retirement income,” says Jason Shapiro, director of consultant relations at Columbia Threadneedle Investments.
Working with defined contribution plans, Shapiro notes, “I can’t think of any sponsors that I’m talking to today that don’t offer systematic withdrawals, [but] the usage is very low.”
However, for plan sponsors to successfully focus on incorporating different account decumulation options “takes a concerted effort by recordkeepers custodians, managers, plan sponsors [and] consultants to make sure that this is easy for participants,” adds Shapiro.
Plan sponsors offering systematic withdrawal facilitates participants to draw down assets from their account balance gradually, allowing workers to spend from their account balances while also retaining the benefits of enrollment in a retirement plan with institutionally priced investments.
But systematic withdrawals are not a perfect solution and may require work to make them a better option, advises Shapiro.
“Often [there is] a systematic withdrawal feature that lives somewhere on a recordkeeping platform, but it’s not directly tied into the open architecture options in the plan,” Shapiro says. “The investments, depending on the recordkeeper, don’t even live in the same module, [so the participants] have to exit [the] retirement platform [and] go to a different retirement income or wealth management platform,” he said.
Kerry Bandow, head of defined contribution solutions at Russell Investments, agrees that a change has occurred in the retirement income conversation.
“I’ve been [working] in DC now 30 years, and it feels like we’ve talked about retirement income for 29 and a half years, and there’s been almost no movement at all. I think it feels different now,” says Bandow.
He urges plans to “do something, do [annuities], do anything. We still find DC plans in which the only choice for distributions is lump sum distributions, and so updating the plan document to allow for at least periodic distributions through retirement is a first step.”
With a myriad of insured options providing guaranteed lifetime income and non-guaranteed options aiming for growth and preservation, many plan sponsors are examining how to proceed, but some are struggling with decisionmaking, or fear of missing out on better options to come.
Plan sponsors are likely to only achieve adequate take-up of such options if retirement income and decumulation are fused to the plan’s qualified default investment alternative and added to the glidepath of target-date funds, says Bandow.
For plan sponsors looking at ways to incorporate decumulation options, one option is dividing workers into different categories of investors and assigning a specific solution to each group, he says.
“A particular client segmented their participants and ultimately chose a decumulation strategy for these groups: target-date fund investors, managed account investors and core fund investors [those that chose between the active and passive options rather than TDFs],” he says.
A brief interlude of research
Most DC plans have a lot of work ahead of them to design decumulation options and retirement income features into their investment offerings and get options into their plans: 15% of plan sponsors are currently evaluating products or implementing a retirement income solution, according to research published by PGIM Investments in April. Only 37% of surveyed plan sponsors said they allow participants to take systematic withdrawals at retirement, the research found.
PGIM Investments put hard numbers to the limited steps that many plan sponsors have taken to incorporate additional easily accessible tools, including Social Security optimization tools and retirement readiness objectives to measure participants’ progress, along with facilitating greater attention by participants to setting up decumulation or retirement income options earlier in their careers.
More than 60% of plan sponsors have not yet taken steps to increase retirement readiness for participants; 37% allow participants to take systematic withdrawals; 27% set retirement readiness objectives for participants and measure results; and 13% provide a Social Security optimization tool for participants, the research found.
Meanwhile, 27% of plan sponsors said they are not currently interested in offering a retirement income solution.
The end starts at the beginning
Lucas Hellmer, director of benefits at Salas O’Brien, a construction engineering company in Irvine, California, says the company’s plan is experiencing its own challenges because participants have a wide variety of needs.
“Individuals are unready for retirement,” which in turn effects the approach to retirement income and decumulation options, he says.
Some participants are not at an optimal level of readiness for retirement, and another significant population is pursuing a phased approach to retirement, Hellmer says, while some participants at the end of their careers have not accumulated sufficient account balances.
“We have individuals [at the company] that are in a phased retirement approach—they are at retirement age and want to continue working well into their 70s, 80s—and [want to] continue to work for our company, which is great, [because] we’re retaining those resources within our organization,” Hellmer says. “While there are some that are doing very well, there are some [individuals in the plan] that unless they have other retirement plans … they’re not going to be able to retire [comfortably], even with Social Security.”
