Recruiting

Forking Over for a 401(k): Not if You Have Student Loans

By Holly Jones, JD, Senior Legal Editor

Take a moment and picture your workforce. Employees come in each day and serve customers, build products, promote brands, and counsel clients, but what is their “Why?” What are the primary factors that drive your employees to come into work, even when they have a case of The Mondays?

Maybe your employees thrive on the personal or professional development, or the opportunity to be part of something larger than themselves—and, it’s okay to admit, maybe they’re working for the paycheck, too.

So, once they have that all-important salary in the bank, what do your employees do with their earnings? What’s behind the paycheck and the drive to do more for you in order to earn more for themselves?

Perhaps they’re working to pay rent or a mortgage, to afford a nice car, to begin or support a family, to enjoy a yearly vacation, or to save for retirement. Your employees may contribute to charity, pay off medical expenses, enjoy a night out, or pursue a hobby or three.

They may also be paying off student loans.


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Higher Learning Means Higher Loaning

Let’s rattle off a few numbers and statistics. Credit bureau Experian recently conducted an analysis of student loan trends from 2008 (the beginning of the recession) through 2014. The findings:

  • The total amount of student loan debt has reached an all-time high of $1.2 trillion.
  • 40 million consumers have at least one open student loan, with an average of 3.7 loans per person.
  • The average balance of each loan is $9,000, with the average consumer carrying an educational debt burden of $29,000.
  • Student loans increased by 84 percent since the recession. Every other major category of consumer lending (home equity loans, credit card, and automotive debt) decreased over that time.

Experian also reports that of the 40 million consumers carrying student debt, 13 million of these are between ages 18-34. This means that the majority of consumers carrying student debt are actually age 35 or older. In other words, though student debt is definitely an important matter for millennial workers, it doesn’t only affect millennials.

What Does This Have To Do With Employers?

Does your company offer a 401(k)? Of course, most companies do. In fact, the 401(k) has become such a standard part of the total employee compensation package that employers who choose not to offer—and match a percentage of contributions to—employee retirement accounts may find themselves working harder to compete for key workers.
“What do you mean you don’t offer a 401(k)? Google does.”
“What do you mean you don’t offer group health insurance? Amazon does.”
“What do you mean you don’t offer paid vacation? Netflix does.”
Right?

But isn’t it strange that this key employee benefit is one workers can’t take advantage of—and won’t fully value and appreciate—until they’re no longer part of your workforce? This isn’t to suggest that retirement planning isn’t a valuable and important workplace benefit—it is—but it’s one that is primarily meant to incentivize employees to prepare responsibly for when they leave the workforce.

And yet, consider those 40 million consumers carrying student debt right now.

Younger workers, recent college graduates, workers who have returned to school for more training to change or further their careers, and professionals with particularly high student debt burdens may not have the disposable income to contribute to retirement plans. Even among those who could afford to contribute, an individual with $60,000 in student loans at 6.9 percent interest may be more driven by the guaranteed return on investment found in paying off those student debts more quickly.


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Further, numerous surveys and studies have revealed that people with student debt often postpone major life decisions—buying a home, getting married, starting a family, and saving for retirement—until their debts are paid. Those with student loans may be more interested in the short-term goal of freeing up their debt-to-income ratio in order to purchase a home, leaving retirement savings for later.

If your company provides a 401(k) match, then this means these workers are leaving a portion of their employee benefits package on the table—not through lack of interest, but rather inability to participate. The present value of paying down their student debt—especially for younger workers—is higher than the value of retiring umpteen years from now. As a result, your 401(k) plan, no matter how generous, is not incentivizing these workers, it’s not recruiting them, and it’s not retaining them.

If retention and recruitment are the goals of your well-crafted benefits strategy, then it may be time to consider a new type of 401(k)—one that can help workers achieve the personal goals that precede retirement.

Tomorrow we’ll learn more details about the “student loan 401(k),” plus an introduction to BLR’s new HR Playbook: The Total Rewards Framework: Build Loyalty, Engagement, and Retention.

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