401k Updates for New (and Old) Grads

Great news for anybody with student loan payments – that is, depending on your employer.

What is the new legislation regarding student loan payments?

Starting in 2024, it will be possible for your employer to match your student loan payments in the same way they would match payments towards a qualified retirement plan. The new legislation treats your student loan payments as elective deferrals, similar to your own contributions, and thereby activates the SECURE Act 2.0 employer-matching contribution policies. This facilitates eligible employees of participating employers to prioritize saving for their retirement and ensure they do not lose out on matching contributions for their retirement plans.

Younger generations tend to churn through jobs at a higher rate. Not only is the government creating new ways for people with student loan payment to save money, employers can also use these new options to better attract and retain employees.

What is the difference between 401(k) and Individual Retirement Accounts (IRAs)?

First let’s hit the basics – Both 401(k) and Individual Retirement Accounts (IRAs) are popular retirement savings vehicles in the United States, but they differ in several ways:‍

Employer-sponsored plan: A 401(k) is a retirement savings plan that is typically offered by an employer to its employees, while an IRA is an individual retirement account that an individual opens on their own.

Contribution limits: The contribution limit for 401(k) plans is higher than that for IRAs. In 2022, the contribution limit for a 401(k) is $20,500, while the contribution limit for an IRA is $6,000 (or $7,000 if you are age 50 or older).

Employer matching: Employers may choose to match a portion of their employees' 401(k) contributions, which can help to increase retirement savings. There is no employer matching for IRA contributions.

Investment options: 401(k) plans generally offer a limited selection of investment options, while IRAs offer a wider range of investment choices.

Withdrawals: Both 401(k) plans and IRAs have penalties for early withdrawals made before age 59 1/2, but the penalties and rules for withdrawals differ between the two types of accounts.

Rollovers: A 401(k) account can be rolled over into an IRA when an employee leaves their job, providing more investment choices and flexibility. Conversely, an IRA can be rolled over into a 401(k) plan if the plan allows it, but this is less common.

Overall, 401(k) plans are an employer-sponsored retirement savings plan, while IRAs are individual

retirement accounts that can be opened by anyone. The two types of accounts have different contribution limits, employer matching, investment options, and withdrawal rules.

What is the impact of SECURE Act 2.0?

Now that we are square there, this portion of the SECURE Act 2.0 opens up a new world of possibility. According to Best Colleges –

1. Federal student loans have been taken out by 43.5 million Americans as of 2022.

2. In 2021, roughly 13% of the U.S. population held federal student loan debt.

3. 9.9 million borrowers currently carry student loan debt in the range of $20,000-$40,000 in 2022.

4. Between 1999 and 2018, a higher percentage of female undergraduate students received federal loans than their male counterparts.

Student loan payments, at least historically, are not an optional payment. Most people prioritize covering their student loans before, and hopefully in addition to, contributing to their 401k.  The issue though is that most often employer’s match contributions you make, to a certain point, for your 401k. So if, you put money against your student loan, instead of contributing to your 401k, you are foregoing you’re the company match. I know it doesn’t sound like a lot, but the company match adds up – and it's “free” money.

This new provision allows an employee to count their student loan payments as if they were contributions to a company’s 401k and allows an employer to “match” alongside those payments. This is an important new opportunity and avenue for savings for those actively making student loan payments (over 40M Americans).

How to find out more and take next steps

1. Ask your employer what they have heard about the update and what their plans are

2. If you are an employer, ask your financial advisor (hopefully they have already started communicating to you)

3. The final details are still evolving, e.g. how to provide documentation of payment and if it is required monthly, quarterly or annually

To close, this is great news and a big step forward for employee’s with student loans and a great opportunity for forward thinking employers to attract and retain employees. 401k saving is a significant component of an individual's net worth and builds overtime.

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