Student loan payments can be a significant financial burden on people who are in the early stages of their careers — limiting their ability to invest for the future at a time when saving for retirement tends to have its highest payoff.
Not only do workers pumping their extra cash into loan repayments miss out on years of compounding investment growth, but they often also forgo a key benefit being offered by their employers: the retirement savings match.
Now, a federal retirement reform law that took effect this year is targeting this problem, authorizing employers to match employees’ student loan payments with retirement contributions. Employers can put money into their corporate sponsored retirement program on behalf of a worker who’s paying student loans — regardless of whether employees are themselves putting anything into their 401(k) accounts.
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Previously, employers made matches only for those who were saving at least a sliver of their salary for retirement.
“This can help that those who can’t afford to contribute to the retirement get a start in accumulating assets in their retirement plan while they’re paying down their debt,” said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute in Washington.
The change is especially welcome news for employees who haven’t yet started saving but have resumed making loan payments following a 42-month COVID-related moratorium, and who don’t want to miss out on the chance to grow their money for retirement.
Starting young is the key to building a nest egg, thanks to the power of compounding — or reinvesting your returns so that they can grow along with your principal. And that’s to say nothing of the “free money” that comes from employer matches.
Fidelity Investments and Vanguard Group, market leaders in retirement plan administration, have already begun offering such services to their corporate clients and investment advisors.
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“It’s been really exciting for us to see how positive the sentiment has been,” said Amanda Hahnel, Fidelity’s head of student debt retirement. Fidelity’s own research shows 84 percent of people with student debt felt their loans were limiting their ability to build a nest egg.
Liberty Mutual is among the local companies taking advantage of the new federal flexibility. The insurer has begun offering it to its 34,000 employees across the country. It’s matching 50 cents for every dollar for a total of 8 percent of your pay, whether you’re only paying down the student loan or doing a combination of student loan and 401(k) saving.
When Liberty Mutual began offering the program in January, 585 staffers enrolled right away, Liberty Mutual said, and more than half were women. Because student loan debt is known to disproportionately affect women, particularly women of color, the company’s excited about the initial results, said Verlinda DiMarino, head of benefits. In addition to the loan-match, it’s also offering one-on-one financial counseling to its staffers dealing with debt. That’s on top of an existing tuition assistance program.
“If you’re concerned about your finances, it’s affecting you — your mental and physical well-being — and that might be contributing to a lack of engagement,” said DiMarino. “We want to help in whatever way people decide to save.”
Still, some employers are uncertain. Of twenty large Boston employers contacted by the Globe, only three said they were still weighing whether to add the measure to their benefits package later in the year, while a couple said they were waiting to see what the Biden administration does next about the ballooning $1.73 trillion student debt. Just this month, the White House canceled higher education-related debt for another 206,000 individuals in a new repayment plan.
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Amid the uncertainty, “it becomes a kind of chicken or the egg for these companies whether or not they want to put a bunch of money and resources into this,” said Michael Shea, founder of Pension & Benefits Associates, a retirement consultant in West Springfield.
Additionally, some companies are struggling with how to implement the student loan plan. Some are waiting for certainty on what will constitute a so-called “qualified student loan payment.”
The American Retirement Association, a trade group, has sought clarification from the Internal Revenue Service on this and a handful of other technical issues.
Overall, the organization expects large companies to lead the way on the new benefit, with the offerings eventually trickling down to midsize and smaller companies, said Will Hansen, said ARA’s chief government affairs officer, in Washington.
Vincent Smith, a partner at investment consultant Fiducient Advisors, in Boston, believes companies will ultimately see the student loan match as a recruitment incentive.
“The labor market generally remains pretty tight, and we’ve lots of folks on the recruiting side who’re looking for ways to get talent into their organizations,” said Smith.
Additionally, it places no additional financial strain on companies.
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“It’s money that the company has already budgeted for in the existing plan,” said Nate Moody, of Lebel & Harriman Retirement Advisors, in Falmouth, Maine. “It’s just helping more employees to take advantage of it and I think that’s really the nice part of this program.”
Not everyone’s convinced, though.
David Aronson, chief executive of student debt specialist Peanut Butter, in Chicago, wonders whether the program will have much of an effect. Typically, only 15 percent of people who are offered a 401(k) decline to participate, according to Vanguard. Most of those people didn’t go to college, Aronson said, so they don’t have student debt. “So, what will these employers get? Maybe, one or two more percentage points of participation in their 401(k) plans,” he said. It’s just not going to make a difference for the employers or employees.
Eversource, in Boston, echoed Aronson’s point.
“Because the vast majority of our employees actively participate in our 401(k) programs and take advantage of the company match that’s already available, we’re not currently implementing the [provision] that allows for the treatment of student loans repayments as 401(k) contributions,” said an Eversource spokesperson.
Suchita Nayar can be reached at suchita.nayar@globe.com.