- Many Americans feel they have to choose between paying off student loans and saving for retirement.
- SECURE Act 2.0 would allow companies to add money to 401(k) plans for workers as they pay off loans.
- But Congress needs to pass the bipartisan legislation by year end or start over.
Americans saddled with student debt who have trouble saving for retirement could get a major boost, but it’s up to Congress to do its job – and quickly.
Congress has until year-end to pass the SECURE Act 2.0, a package of proposed retirement changes to help Americans save more for retirement. Tucked into the broad package is a measure that would allow employers to count employees’ student loan payments toward their retirement match, effectively increasing retirement contributions for those employees. Currently, companies can only match employee contributions.
Student loans have become a flashpoint, with the Biden administration saying it wants to forgive as much as $20,000 in student debt for qualified individuals to give them a chance to, among other things, save for retirement. Graduates with student loans accumulate 50% less retirement wealth by age 30, according to a 2018 study by the Center for Retirement Research (CRC) at Boston College.
“Interestingly, graduates’ retirement plan assets are not sensitive to the size of their student loans, suggesting that the simple presence of a loan looms large in their financial decision-making,” CRC said.
What is SECURE Act 2.0?
Earlier this year, the U.S. House of Representatives passed the Securing a Strong Retirement Act of 2022, and the Senate approved The Enhancing American Retirement Now (EARN) Act and the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act. These three bills are the basis for the SECURE Act 2.0, which builds on the 2019 SECURE Act.
The 2019 SECURE Act included giving part-time workers better access to retirement benefits and increasing the age when required minimum distributions (RMDs) from certain retirement accounts must start to age 72 from 70½.
How would this affect me?
SECURE Act 2.0 is meant to help Americans save for retirement, but one particular proposal that would allow companies to contribute to 401(k) plans for an employee making student debt payments could help solve a problem affecting millions of people.
Eighty-four percent of adults said student loans limited the amount they’re able to save for retirement, according to a 2019 study by MIT Age Lab and TIAA. Among those who weren’t saving for retirement at all, 26% said it was because they had to put their money towards paying off student loans.
“Employees, including those who are not in a position to contribute at all to their 401(k) accounts because of student loans, who participate in the new program could accumulate tens of thousands of dollars in their 401(k) accounts over a decade, which could be worth hundreds of thousands of dollars at retirement,” insurance company The Travelers Companies said in a release announcing its Paying It Forward Savings Program in 2020.
The program considers student loan payments when determining the company’s 401(k) contribution. “That demonstrates the importance of starting to save for retirement early in order to realize the benefit of compounding returns over time,” Travelers said.
Though some companies have launched programs like Travelers’ to help their employees, Congress is formalizing guidance in the SECURE 2.0 Act to make it easier for all businesses to do so.
Details like start dates, compliance requirements, tax treatment and whether nonprofit organizations and government employers could offer the benefit have yet to be determined, but both Democrats and Republicans support the idea that Americans shouldn’t have to choose between paying off education debt and saving for their futures. They say they should be able to do both.
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How could such a plan work?
Abbott Labs was the first to launch such a program in 2018 with clearance from the IRS. Its Freedom 2 Save program allows employees who contribute 2% of their pay toward their student loans to receive 5% of their pay in their 401(k) even if they don’t contribute a penny to that retirement savings account. Since then, about 1,900 have signed on, and other companies have followed suit .
“We were hearing from our employees it’s hard to participate in the 401(k) match when they have a monster student loan to pay off,” said Jenny Guldseth, chief human resources officer at Allianz Life, which launched its Student Loan Retirement Program in 2020. “We wanted to help them and show that we care for our employees, about their personal and professional lives. We knew it would be really meaningful, especially among lower paid employees.”
Allianz Life assesses an employee’s student loan payments and determines how much the company will contribute to their 401(k) account, up to the full 7.5% of eligible pay match. About 2% of employees eligible for the program participate, Guldseth said. The company has 2,100 employees.
“Once I got into my career, I got super into saving and paying down that (student) loan and trying different ways to pay it down,” said Lauren Childers, Allianz Life compliance analyst. When she started working in February of 2021, she learned about the company’s student loan/401(k) match program during her onboarding and enrolled.
“I continued to make payments on my student loan and watch that balance dwindle down and knew on the backend I was going to get a lump payment in the first quarter of 2022 into my 401(k),” she said. Allianz accepts uploaded pictures of employees’ student loan payments as documentation and makes an annual payment into the 401(k).
“It was just nice knowing that I was like ‘Ok, I’m going to throw all my money into this (debt payment) and next year, I’ll have an extra bonus amount from the company for those months I wasn’t putting money into my 401(k),’” Childers said
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What other proposals are included in SECURE Act 2.0?
Proposals supported by the House and Senate in the three bills passed by the House and Senate include:
- Automatic enrollment into new company retirement plans
- Raising when required minimum distributions must start to age 75 years from 72
- Increasing catch-up contribution limits for people above a certain age that’s still being determined
- Financial incentives for contributing to a plan
- Expanded access to retirement plans for long-term, part-time workers
- Expanded access to the Saver’s Credit (a tax credit for contributions) for lower- and middle-income workers
- Easier access to retirement accounts for emergency situations
Differences must still be reconciled into a final bill for a congressional vote. If passed, it’ll be sent to the President to sign into law. This all must happen by year-end. Otherwise, the entire legislative process would need to start over with the next Congress in January.
“It’s a tight window for passage, but it’s still likely because it’s such a bipartisan piece of legislation,” said Dave Stinnet, a principal who heads Vanguard Strategic Retirement Consulting.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at firstname.lastname@example.org and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
Story Credit: usatoday.com