Prudential Offers 401(K) Incentive to Reward Employees for Paying Down Student Loans
Posted By Donna Fuscaldo on April 20, 2016 at 9:35 am
Everyone knows they should save for retirement but student loan debt is preventing that from happening for millions of Americans.
That is particularly alarming because it could set up a situation in the years to come where countless people are facing a retirement shortfall that will drastically change their lifestyle when it comes time to retire. And while it isn’t a problem of millennials today, it may become a significant one if something isn’t done about the student loan debt crisis.
Prudential Retirement thinks it has an answer – and it’s not paying a portion of their employee’s student loan debt. Rather, Prudential’s approach rewards employees for paying down student debt by contributing more to the employee’s 401(K) plan, and they believe this will have a much more positive impact than paying $100 a month to lower the student debt load.
“Just like others in the marketplace we are realizing how huge of a problem student loan debt is and how many workers choose to pay down debt instead of saving for retirement,” says Snezana Zlatar, senior vice president and head of product for Total Retirement Solutions at Prudential Retirement. “We are committed to maximizing retirement security for employees across the board.”
Student loan debt prevents people from saving for retirement
There’s no question the $1.3 trillion in student loan debt is creating problems for all types for employees. It is preventing them from purchasing homes, starting a family and saving for their most expensive purchase: retirement. The Center for Retirement Research recently found carrying student loan debt can have the same impact on retirement savings as unexpected health care costs and increasing the social security retirement age. That means countless people who face a retirement savings shortfall will struggle to survive in retirement, a period of time that can easily last more than twenty years. Seventy-three percent of college graduates are putting off saving for retirement, according to Student Loan Genius, the Austin, Texas-based start-up that helps employers offer student loan debt reduction as a benefit.
Since student loan debt is such an issue, companies are starting to respond. A handful of employers including PWC and Fidelity Investments have begun paying down a portion of their employees’ student loan debt, using it as a recruitment and retention tool. The way they see it, the less debt burden the employee has, the more likely he or she will be able to save for retirement. Not to mention it gives employees a reason to stay at the company, lowering the cost of recruitment and retention.
Prudential teams up with Student Loan Genius to provide 401 (K) match service
Prudential teamed up with Student Loan Genius to become the first to offer Student Loan Genius’ 401 (K) contribution feature to its customers. It works like this: Employers can reward workers who make student loan payments processed through Student Loan Genius with a pre-tax contribution to their company-sponsored retirement account. The employee doesn’t have to contribute to their 401(K) plan to receive the matching contributions. The match can be paid as a flat dollar amount or a percentage of the employee’s student loan payment.
Let’s say an employee pays $75 a month to their student loan, an employer can choose to match that, putting $75 in the 401(K) plan each month. If the student loan bill is $400 a month, the employer could put a percentage of that in the company-sponsored retirement plan. The benefit can be offered annually, monthly or for each pay period.
Prudential thinks it on to something because it not only incentivizes employees to pay off their student loan debt but it offers a way for them to save for retirement, something that typically isn’t possible when you are faced with a big student loan bill each month. It’s also attractive because the benefit is tax advantaged, unlike the employer student loan assistance benefit. With that, the money is treated as income, which means employees will owe come tax time. It doesn’t hurt that when saving for retirement in a 401(K) the investment is going to benefit from compounding, or the principal and the accumulated interest.
Take a 22-year-old employee who invests $100 in his or her 401(K) each month for ten years. At retirement, that will amount to $156,000 in extra money, says Jovan Hackley, director of marketing at Student Loan Genius.
Offering to help employees with their student debt is in its infancy, which means the jury is still out on whether or not paying off the debt or increasing the contribution to a 401(K) is the best way to tackle the student loan debt problem. John Sweeney, executive vice president at Fidelity Investments, says employees, who have a choice, need to consider the interest rate on their student loans before deciding. “If the debt is at 4 percent or 5 percent and you get mid-single digits returns in your equity portfolio, it is a reasonable trade-off to make over a long period of time,” says Sweeney.
If the employer offers a 401(K) match, which means free money for the employee, it becomes a no-brainer. “You can’t come up with a better return on your investment than 100% matching contribution,” says Sweeney.