How to decide if you should offer a 401(k) match on student loan payments
SECURE 2.0 gives 401(k) plan sponsors the option to offer matching contributions on qualified student loan payments.
Our three-step process balances the needs of your people, your budget, and your operations to help you as you decide if offering a 401(k) match on student loan payments is right for your company.
Step 1: Assess your people’s needs
When thinking about your team, it’s important to consider your current employees and future hires. The workforce is evolving and the needs of your employees may evolve as you hire.
- Your current employee’s needs: You’ll want to review your workforce’s current participation in your 401(k) plan. If you see that enrollment and savings are high, you may not have a need. On the other hand, if you see larger portions of younger graduates not enrolled, student loan matching may be a good fit. If feasible, talk with your employees to better understand their needs. Remember, it’s not always younger employees who are paying student loans. (Tip: If you offer other student loan benefits, like direct reimbursements, look at who is using those benefits and whether or not those employees are also contributing to their 401(k). A 401(k) match on student loan payments may be a good fit if you see a savings problem.)
- Your future employee’s needs: Your workforce in a few years might look different than your workforce today. Consider the types of employees you want to attract over the coming years. For recent grads, especially when hiring for key roles, this new type of 401(k) match could be a differentiating factor when deciding where to accept a job.
Knowing your employee’s needs is crucial to engagement and retention, but next, you’ll need to know how much that will cost.
Step 2: Review your budget
There are two cost aspects to consider when budgeting for offering a 401(k) match on student loan payments.
- Matching contributions: You’ll need to review the cost of matching contributions, considering employees whom you previously did not provide with matching contributions. Your goal is to calculate the incremental cost. You may already be budgeting for these potential contributions if you include them in your salary match budget. But it’s important to estimate the actual increase you could see year-over-year in matching contributions.
- Operational costs: Depending on your 401(k) provider, you may have technology-related costs, although they should be minimal in most cases. Also, consider “soft costs” like employee time used to manage operating processes. With the right technology, these operational costs can be relatively low.
The goal of reviewing your budget is to walk away with a confident estimate of the total annual costs of offering the benefit. Knowing that, you can decide whether the cost makes sense. Ultimately, understanding the ROI of the decision is fundamental for your business. That’s why we recommend taking it a step further and calculating the ROI of offering a 401(k) match on student loan payments.
Step 3: Understand your operational needs
Anything new in business usually comes with process changes. And that’s true if you adopt a 401(k) match on student loan payments. When analyzing how to efficiently manage this new plan feature, consider the following:
- Automation via technology: Work with your plan’s tech platform to understand their capabilities. Ideally, most of the process will be streamlined for you and your employees.
- Human intervention: There will most likely be some manual intervention, such as approving qualified student loan payments in order to process the matching contributions. Understanding who on your team will complete these tasks can help create an efficient process and avoid operational issues post-implementation.
We recommend mapping out a process as you initially launch a 401(k) match on student loan payments. You’ll be able to train your staff, explain the feature to employees, and make adjustments as needed.