For many employers student debt assistance is the next frontier in employee benefit design. And with over $1.4 trillion in student debt, second only to mortgage debt for Americans, it’s easy to see why.*
In August of 2018 a private letter ruling from the IRS that stated, under certain circumstances, an employer can link 401(k) match to student loan repayments outside the plan. You may be thinking, what does one have to do with the other. Considering that college graduates with student debt accumulate 50% less retirement wealth in their 401(k) by age 30 than those without**, this type of program could be key in boosting this groups retirement savings.
One interesting factor is that adding student debt program like Flexmatch would likely not increase employer costs, instead just shifting them from one bucket to another, while offering an attractive option to those who may be dealing with conflicting financial priorities.
For more information on student debt matching program, contact your SRP Managing Director.
*Federal Reserve Bank of New York
** Center for Retirement Research at Boston College http://crr.bc.edu/wp-content/uploads/2018/06/IB_18-13.pdf
Many plan sponsors struggle with deciding how many investment options to offer in their retirement plans. While people generally like to have lots of options when making other decisions, having too many plan options can potentially lead to poor investment decisions by plan participants. In addition, increasing plan options can also increase plan costs, as well as the administrative paperwork associated with the plan.
In a study on retirement plan options, researchers concluded that it is possible to present plan participants with too many options.1 The researchers began by offering people selections of jams and chocolates. Some were offered a wide variety, while others received less choices. The wide variety of jams attracted more attention from people, but more people purchased jams when offered limited choices. When sampling chocolates, people enjoyed choosing from the larger selection more, but also were more dissatisfied with the choices. Those who sampled from a smaller selection were more satisfied and more likely to buy chocolates again. In other words, as the number of options increased, people became more concerned by the possibility of making the “wrong” choice–they became uncertain that they had made the best choice possible.
Chocolates and jams aren’t very big decisions, but the researchers found that these same behaviors carried over to retirement plans. They examined participation rates for 647 plans offered by the Vanguard Group, a large investment management company, covering more than 900,000 participants. They found that as plans increased the number of options they offered, employee participation decreased. In fact, for every 10 options added to the plan, participation dropped by 1.5-2 percent. Plans offering fewer than 10 options had significantly higher employee participation rates.
In addition, more plan options can increase costs both for participants, in the form of fees, and for plan sponsors, who may face additional administrative charges from third party administrators for additional options. Further, auditing and other costs may increase, since the number of options could increase the time necessary to conduct audits.
It’s important to balance choice overload against the requirements of ERISA Section 404(c) which requires plan sponsors to have at least three diversified investment options with different risk and return characteristics.
A number of bills are moving rapidly through the House and the Senate that would (if passed and signed) enhance the retirement plans of many Americans. While these bills continue to morph, below is a general description of provisions as of early April 2019.
Retirement Security & Savings Act
Senators Rob Portman (R-Ohio) and Ben Cardin (D-Maryland) introduced the Retirement Security & Savings Act in December 2018 and have reintroduced it in 2019. The Act is considered to be as sweeping as prior legislation, specifically the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, and Pension Protection Act (PPA) of 2006. Proposals that would impact governmental plans include:
- Eliminate the 457(b) “first day of the month” rule
- Permit 457(b) plans to allow in-service distributions at age 59½ rather than 70½
- Eliminate the Required Minimum Distributions (RMD) from Roth 457(b)
- Allow rollovers from Roth IRAs to Roth 457 plans
- Allowing non-spousal beneficiaries to roll assets into their employer-based plans\
- Updating the mortality tables used when calculating RMD at age 70½
- Exempting small accounts (less than $100,000) from the RMD calculation
- Creating an additional catch-up option for participants over age 60
- Simplifying auto-enrollment participant notices
- Allowing employer matching to retirement plans for student loan payments
Retirement Enhancement and Savings Act
Representatives Ron Kind (D-WI) and Mike Kelly (R-PA) introduced the Retirement Enhancement and Savings Act (RESA) in February. While RESA is primarily aimed at private sector plans, it does include a provision that would allow more time for terminating participants to repay outstanding plan loans.
The Setting Every Community Up for Retirement Enhancement Act of 2019 sponsored by Richard Neal (D-MA) and Kevin Brady (R-TX) has passed unanimously out of the House Ways and Means Committee as of early April and will go to the full House. This bill includes the core provisions of RESA making smaller employers able to join multiple employer plans and includes a safe harbor for selecting lifetime income providers in defined contribution plans. The latest provision of Lifetime Income Disclosure Act (LIDA) has been challenged by plan sponsors as being inflexible. More on both RESA and Secure Act as they move through the House and Senate, but they appear to be supported by both parties and will likely go to Conference Committee and head to the White House.
NAGDCA Legislative Priorities
Each spring, the NAGDCA Executive Board visits congressional representatives in Washington DC to advocate for governmental retirement savings plans and participants. In addition to some of the above proposals, the Board is advocating for:
- Eliminating the “First Day of the Month” rule for 457(b) plans
- Allowing participants to roll Roth IRAs into their plan accounts
- Exempting Roth contributions from the RMD calculation
- Preserving important unique plan features, including allowing both pre-tax and Roth options; maintaining the 10% early withdrawal penalty exclusion in 457(b) plans; and maintaining both traditional and over-50 catch-up provisions.
Please consult with your SRP Managing Director for more information on the status of pension proposals and how they may affect your plan.