Struggling to Save for Retirement While Paying Off Your Student Loans? How One Company’s Novel Approach May Set the Standard for the Future.

September 20, 2018 10:53 am

Derek M. Amey

Partner & Portfolio Manager

Over the summer there was an interesting IRS ruling that was spurred by a single company trying to provide a unique perk to their employees.  Record low unemployment has resulted in a challenge for companies to find and keep qualified candidates, especially recent graduates. In an effort to attract and retain these folks, one company has started a unique new approach to help their employees accomplish two major financial goals: saving for retirement AND paying off student loan debt.

Abbott Laboratories may not be a household name to many, but they are a dominant force in the healthcare industry, employing almost 30,000 people. For years Abbott has given their employees a 5% match in their 401k, provided the employee contributes just 2% of their salary. If the employee is unable to contribute to the 401k, they will not receive any of the match.

Abbott Labs is unique, in that it typically hires 1,000 employees a year who are under the age of 35. Many of these younger employees have advanced degrees which bring higher levels of student debt. Recent studies show that the total student loan debt outstanding in the US is greater than total amounts of credit card debt and car loans. In fact student loan debt is now second in size, behind only outstanding mortgages. Reports are showing that the average student graduating from college in 2018 has $40,000 in outstanding loans.  Abbott Labs watched as many of these folks were unable to save in their 401k and pay off the debt, and thought there may be a solution.

The sad reality is that far too many Americans are not saving enough in their employer sponsored plans to receive their match. We can certainly debate if the primary reason they are unable to save is just because of outstanding student loan debt, but it is a growing problem. I wrote about this a few years ago, about how Boeing employees were missing out on almost $100 million a year in matching 401k contributions.

Abbott Labs approach to help solve this issue is as follows:

If their employee puts at least 2% of their salary towards student loan payments, Abbott Labs will contribute the 5% match into their 401k plan, even if the employee doesn’t put anything in the plan.

Loan assistance for employees is not a new phenomenon. I can remember graduating from URI and having some friends in the nursing field receive offers that included funds to pay off existing debt, if they committed to the hospital for a certain amount of time. These offers will probably continue, but as the VP of HR at Abbott Labs correctly points out in the article “…those payments are taxed, and they don’t necessarily result in employees putting more money into retirement savings.” This is a novel approach to help folks work towards two extremely important financial goals, and Abbott Labs should be commended in my view. My guess is that now that the IRS has given its blessing for this employee benefit, other companies will soon think about adopting it. So if you’re a talented employee, who works for a larger corporation with a 401k plan, who’s struggling to pay off student loans and save for retirement… You may want to send your HR rep the link to the announcement of this plan as a little nudge! http://www.chicagotribune.com/business/ct-biz-irs-student-loan-perk-0902-story.html

 

Derek Amey serves as Partner and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm or our parent company, Focus Financial Partners. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.