The Evolving Landscape of Student Loans Presentation to NEEBC November 20, 2019 Prepared by Aon
What Does This Old Car Have to Do with Student Loans? *Royalty-free image from www.freeimages.com Aon 2 Proprietary & Confidential
Benefits Need to be Grounded in Your Guiding Principles Category Questions to Consider ▪ Talent Strategy Are we focused on attracting talent, retaining talent, or both? ▪ Are we willing to differentiate rewards for key talent pools? ▪ Competitive Position How do we position our total rewards relative to market? ▪ Are we willing to be an early-adopter of innovative designs? ▪ Flexibility/Choice Will we provide for employee choice or stick to a more uniform benefits offering? ▪ Business Objectives How do our rewards support our broader business objectives? ▪ Design/Cost Where are we willing to use employer dollars in benefits vs. providing a low cost/educational role? ▪ How will our program design consider internal fairness? *Not an exhaustive list of categories and questions for guiding principles Aon 3 Proprietary & Confidential
Guiding Principles at the Center of Evaluating Alternatives Market Trends Legal/Regulatory Employee Needs Guiding Principles Vendor Landscape Aon 4 Proprietary & Confidential
Aon’s Financial Wellbeing Framework Companies are positioned to support their workforce in all areas of financial wellbeing: Preserve Protect Prepare Plan ▪ Protection from ▪ Lifetime Income/ ▪ Financial Education ▪ Retirement Investments Areas of Focus ‒ Loss of income ▪ Budgeting ▪ Home ▪ Social Security ‒ Critical illness ▪ Student Loans ▪ Education ▪ Estate Planning ‒ Death ▪ Credit Card Debt ▪ Health ‒ Disability ▪ Financial help ‒ Legal ‒ Other risks Implement Learn Assess Aon 5 Proprietary & Confidential
Student Loan Debt is an Major Issue for Many Americans $1.5T Total U.S student loan debt 1 Nearly 56% 2 in 5 Of employees with early career student loans are employees have just getting by outstanding student financially 2 loans 2 >2.3x more valuable to save 1% at age 25 than 1% at age 65 3 1 Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit 2018:Q4, released February, 2019 2 Aon DC and Financial Wellbeing Employee Survey 2018 (U.S.) 3 Using assumptions and methodology from Aon’s The Real Deal: Retirement Income Adequacy at Large Companies Aon 6 Proprietary & Confidential
Types of Employer Assistance 401(k) Plan Student Loan Refinancing Contribution Other Options Repayment Support Approach: Provide Approach: Offer Approach: Provide Approach: Other access to student loan support for student loan contributions to a creative approaches refinancing repayments to retirement plan to make emerging such as Other employees (all or a up for lost match for allowing unused PTO to 11% those who can’t save subset) with student go towards student loan debt; amount is due to student loan loans provide specified (amount and debt access time period for to 529 payments) Plans Prevalence: 5% Prevalence: 2% Prevalence: Negligible Prevalence: Negligible Examples: Rapidly Examples: PwC, Examples: Abbott, Examples: Unum Penguin Random House growing list Travelers Source: Prevalence data from A on’s 2019 Benefit SpecSelect™ database as of June 2019 reflecting benefits offered to salaried employees at large employers. Aon 7 Proprietary & Confidential
Design Considerations ▪ While student loan burden is most significant with younger employees, other employees may be saddled with PLUS or parent PLUS loan payments ▪ Mid-career employees, and those changing careers, may also carry college loan debt ▪ Offering an employer “match” or direct contribution to student loan vendors (taxable cash) typically represents an added expense, Eligibility depending on how the program is designed. ▪ Designs integrated with tax-qualified savings plans may be less costly, but are typically more complex. ▪ Employers should think carefully about the design of the program, especially regarding eligibility and hard dollar costs. Financial Fairness ▪ Impact Should discussion focus only on student loan debt? ▪ What message does this send to those who managed to get through college without any debt, or who have already sacrificed to pay it off? ▪ Some employees may be sacrificing now to save for future education expenses, such as through Section 529 plans or Coverdell Savings Plans ▪ This discussion has opened the door for a variety of arrangements that allow employees to choose how they want to use employer dollars — either for student loan repayment, 401(k), 529 College Savings, HSA, or even charitable giving Aon 8 Proprietary & Confidential
Examples — Repayment as Taxable Compensation New York Natixis 1 PwC Life ▪ Launched early 2016 ▪ ▪ Available to Launched 10/2017 ▪ Available to Associate ▪ employees with at Available to all level employees (45% least 5 years of employees on first of workforce) service day of employment ▪ $100 per month ▪ ▪ Lump sum payment $170/month employer match of $5,000, then employer toward principal $1,000 for each contribution toward ▪ $7,200 maximum additional year (up principal with 5-year lifetime benefit to 5 years) limit ▪ Administered through ▪ ▪ $10,000 maximum $10,200 maximum Gradifi lifetime benefit lifetime benefit ▪ Administered 1 Natixis Global Asset through Vault Management Aon 9 Proprietary & Confidential
Example — Connecting Student Loans and 401(k) Abbott’s “Freedom 2 Save” Program (2018) ▪ Employees eligible for 401(k) may enroll in Freedom 2 Save ▪ Employees may also make elective contributions into 401(k) Eligibility ▪ Regular 401(k) match equals 5% of pay if employee contributes at least 2%, per payroll period ▪ If employee makes student loan repayments of at least 2% of pay, Abbott will contribute 5% of pay as a Non Elective Contribution (NEC) into 401(k) Contribution ▪ Also eligible for match “true up” if not receive NEC ▪ Calculations per payroll period, and company contributions are made after end of each plan year, if employed on the last day ▪ Single plan administered with recordkeeper and third party vendor Compliance ▪ Cannot be ADP ACP safe harbor ▪ NEC subject to additional nondiscrimination testing IRS Private Letter Ruling 1 clarifies arrangement does not violate 401(k) “contingent ▪ benefit rule.” Other legal issues not addressed. 1 Private Letter Ruling technically applies only to the company that solicited the ruling. Aon 10 Proprietary & Confidential
Example — Direct Employer Repayment Strawman Employee ▪ Employee has 10 year student loan Employee Employer Interest Payments Payments Paid with $30,000 balance ▪ Blue = Standard payment schedule Employee Pays Minimum $39K $0K $9K ▪ Yellow = Employer contributes Employer Contribution $26K $10K $6K $2,000/year for max of 5 years Outstanding Loan Balance by Year 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 0 1 2 3 4 5 6 7 8 9 10 Employee Pays Minimum Employee Pays Minimum + Employer Contribution Other assumptions: 5% annual interest rate. Excludes impact of taxes on employer contribution amount. Aon 11 Proprietary & Confidential
Example — Potential Impact of Student Loan/DC Program Strawman Employee ▪ Hired at age 22 with $50K salary, retires at age 67 ▪ Delays saving in DC plan until age 27 ▪ Saves at 3%, escalating 1%/yr. to 10% ▪ Company match of 100% on 3% of pay Total student loan matching contributions of $8,000 in Projected DC Account by Age first 5 years grow to 2,500,000 $102,000 at age 67 2,000,000 1,500,000 1,000,000 500,000 0 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 No SL Match Added $ from SL Match Other assumptions: 3.75% salary scale, 6% investment return, 2.25% inflation Aon 12 Proprietary & Confidential
Example — Previous Example But No Delayed Savings Delay Savings – No SL Match $2.1M Strawman Employee ▪ Same as previous page, but blue bar shows Delay Savings – SL Match $2.2M incremental impact of not delaying savings (i.e., save 3% at age 22, escalating 1%/yr. to 10%) No Delay in Savings $2.4M Projected DC Account by Age 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 Delayed Savings, No SL Match Added $ from SL Match Added $ from No Delay in Savings Other assumptions: 3.75% salary scale, 6% investment return, 2.25% inflation Aon 13 Proprietary & Confidential
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