The Evolving Landscape of Student Loans Presentation to NEEBC - - PowerPoint PPT Presentation

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The Evolving Landscape of Student Loans

Presentation to NEEBC November 20, 2019

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What Does This Old Car Have to Do with Student Loans?

*Royalty-free image from www.freeimages.com

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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

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Guiding Principles at the Center of Evaluating Alternatives Market Trends Vendor Landscape Employee Needs Legal/Regulatory

Guiding Principles

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Aon’s Financial Wellbeing Framework

Companies are positioned to support their workforce in all areas of financial wellbeing:

▪ Financial Education ▪ Budgeting ▪ Student Loans ▪ Credit Card Debt ▪ Retirement ▪ Home ▪ Education ▪ Health ▪ Financial help ▪ Protection from ‒ Loss of income ‒ Critical illness ‒ Death ‒ Disability ‒ Legal ‒ Other risks ▪ Lifetime Income/ Investments ▪ Social Security ▪ Estate Planning

Areas of Focus

Learn Assess Implement

Prepare Plan Protect Preserve

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Student Loan Debt is an Major Issue for Many Americans

Nearly

2 in 5

early career employees have

• utstanding student

loans2

56%

Of employees with student loans are just getting by financially2

$1.5T

Total U.S student loan debt1

>2.3x

more valuable to save 1% at age 25 than 1% at age 653

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

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Types of Employer Assistance

Source: Prevalence data from Aon’s 2019 Benefit SpecSelect™ database as of June 2019 reflecting benefits offered to salaried employees at large employers.

Other

11%

provide access to 529 Plans Approach: Provide access to student loan refinancing

Refinancing

Prevalence: 5% Examples: Rapidly growing list Approach: Offer support for student loan repayments to employees (all or a subset) with student loan debt; amount is specified (amount and time period for payments)

Student Loan Repayment

Prevalence: 2% Examples: PwC, Penguin Random House Approach: Provide contributions to a retirement plan to make up for lost match for those who can’t save due to student loan debt

401(k) Plan Contribution Support

Prevalence: Negligible Examples: Abbott, Travelers Approach: Other creative approaches emerging such as allowing unused PTO to go towards student loans

Other Options

Prevalence: Negligible Examples: Unum

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▪ Offering an employer “match” or direct contribution to student loan vendors (taxable cash) typically represents an added expense, 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. ▪ 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

Design Considerations

Eligibility Fairness Financial Impact ▪ 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

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Examples—Repayment as Taxable Compensation PwC Natixis1 New York Life

▪ Launched early 2016 ▪ Available to Associate level employees (45%

• f workforce)

▪ $100 per month employer match toward principal ▪ $7,200 maximum lifetime benefit ▪ Administered through Gradifi ▪ Available to employees with at least 5 years of service ▪ Lump sum payment

• f $5,000, then

$1,000 for each additional year (up to 5 years) ▪ $10,000 maximum lifetime benefit

1Natixis Global Asset

Management

▪ Launched 10/2017 ▪ Available to all employees on first day of employment ▪ $170/month employer contribution toward principal with 5-year limit ▪ $10,200 maximum lifetime benefit ▪ Administered through Vault

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Example—Connecting Student Loans and 401(k)

▪ Employees eligible for 401(k) may enroll in Freedom 2 Save ▪ Employees may also make elective contributions into 401(k) ▪ Regular 401(k) match equals 5% of pay if employee contributes at least 2%, per payroll period

Compliance Contribution Eligibility

▪ 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) ▪ 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 ▪ Cannot be ADP ACP safe harbor ▪ NEC subject to additional nondiscrimination testing ▪ IRS Private Letter Ruling1 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.

Abbott’s “Freedom 2 Save” Program (2018)

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Example—Direct Employer Repayment

5,000 10,000 15,000 20,000 25,000 30,000 35,000 1 2 3 4 5 6 7 8 9 10

Outstanding Loan Balance by Year

Employee Pays Minimum Employee Pays Minimum + Employer Contribution

Strawman Employee ▪ Employee has 10 year student loan with $30,000 balance ▪ Blue = Standard payment schedule ▪ Yellow = Employer contributes $2,000/year for max of 5 years

Other assumptions: 5% annual interest rate. Excludes impact of taxes on employer contribution amount.

Employee Payments Employer Payments Interest Paid Employee Pays Minimum $39K $0K $9K Employer Contribution $26K $10K $6K

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Example—Potential Impact of Student Loan/DC Program

500,000 1,000,000 1,500,000 2,000,000 2,500,000 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66

Projected DC Account by Age

No SL Match Added $ from SL Match

Total student loan matching contributions of $8,000 in first 5 years grow to $102,000 at age 67 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

Other assumptions: 3.75% salary scale, 6% investment return, 2.25% inflation

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Example—Previous Example But No Delayed Savings

500,000 1,000,000 1,500,000 2,000,000 2,500,000 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66

Projected DC Account by Age

Delayed Savings, No SL Match Added $ from SL Match Added $ from No Delay in Savings

Strawman Employee ▪ Same as previous page, but blue bar shows incremental impact of not delaying savings (i.e., save 3% at age 22, escalating 1%/yr. to 10%)

Other assumptions: 3.75% salary scale, 6% investment return, 2.25% inflation

Delay Savings – No SL Match $2.1M Delay Savings – SL Match $2.2M No Delay in Savings $2.4M

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Vendor Landscape

The vendor market is emerging as programs gain popularity:

CommonBond

▪ Offers refinancing and employer match option ▪ Has evaluation tool (employer-paid flat fee) to help manage student loan debt via qualifying federal, state and private repayment and loan forgiveness options ▪ Underwrites their own loans

Gradfin

▪ Repayment services ▪ 3 core student loan benefit program services to help employees pay off their student loans faster so that they can begin saving for the future ▪ Minimum: 3,000 employees

SoFi

▪ Primarily involved in refinancing, has added employer match option ▪ Geared toward professionals with high loan amounts ▪ Underwrites their own loans

Ed Assist

▪ Full range of services— refinancing, consolidation, employer contribution ▪ Partners with CommonBond for refinancing ▪ Division of Bright Horizons

Gradifi

▪ Repayment services with employer contribution option ▪ Offers debit card with “credits” toward loans ▪ PwC is their anchor client ▪ Subsidiary of First Republic Bank

Vault

▪ Repayment services with employer contribution option ▪ Promotes interplay with 401(k) plan (e.g., employee loan payments trigger employer contributions to 401(k), 403(b)

• r 457 plan)

Fidelity

▪ Offers refinancing and employer match services ▪ Tool available (no charge) which provides refinancing alternatives

Peanut Butter

▪ Full range of services— refinancing, consolidation, employer contribution management, debt counseling

Tuition.io

▪ Repayment services with employer contribution option. ▪ Partners with lenders for refinancing (e.g., Sofi)

Partial List of Vendors

This is not a list of recommended providers.

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Legislative Developments for Student Loans

Employer Participation in Repayment Act (H.R. 1043 and Companion Bill S. 460)

In February, legislation was reintroduced to facilitate tax-free student loan assistance: ▪ Currently tuition assistance can be provided tax free up to $5,250 under Section 127 of the federal tax code ▪ Proposal would expand Section 127 to include student loan repayment ▪ Final legislation on this topic does not appear imminent

Considerations for Plan Sponsors

▪ These bills would create a tax-efficient way for employers to help pay down employees’ student loans ▪ Changes the relative attractiveness of the 401(k) integrated approach, which is already tax-efficient by design – In May 2019, an IRS representative stated that the IRS is working

• n guidance for these types of designs

– The IRS will not be considering further Private Letter Rulings while the agency works on the guidance project EPRA

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Potential Next Steps to Assess Feasibility for Your Organization

Review → Navigate the legal and administrative complexities

▪ Carefully consider impact to administrative procedures and plan documents if student loan program is integrated with the DC plan ▪ Not all vendors are able to navigate the complexities of this type of design

Assess → Understand your workforce and model plan designs

▪ Collect basic employee demographic and DC plan data to model alternative designs ▪ Evaluate alternatives in light of your employee demographics, program cost, and guiding principles ▪ Prepare business case for/against a student loan program

Implement → Prepare for vendor selection (if needed)

▪ Decide on key criteria for vendor selection ▪ Collect initial list of vendors that meet your key criteria and are able to handle your employee population and program design