The ROI potential of offering a 401(k) match on student loan payments

Over 20% of employees would consider leaving their jobs for a 401(k) match on their student loan payments. But can you afford to offer the benefit?

illustration of ROI calculator

In a 2022 Betterment survey of over 1,000 employees, we found that student loans are an important issue for many employees.

  • 64% of employees said student loans have had an impact on their ability to save for retirement
  • 21% of employees reported that a 401(k) match on student loan payments would entice them to leave their jobs.

Generally, we believe that the more employees who participate in a 401(k) program, the less turnover a company will see. Data from payroll software provider Gusto backs up that belief. They report that employees with a 401(k) plan are 32% less likely to quit in any given month.

We see a large opportunity for savvy employers to build stronger 401(k) programs to retain their employees. Adding benefits like a 401(k) match on student loan payments could be a difference maker.

But how does an employer know if the costs of offering a 401(k) match on student loan payments is worth it? Let’s dive in and find out.

First, some SECURE 2.0 fast facts

Before we look at the potential ROI of this new match, let’s cover some fast facts about the provision included in the SECURE 2.0 Act.

  • Effective date: January 1, 2024
  • 401(k) student loan matching: Qualified student loan repayments could count as elective deferrals and qualify for 401(k) matching contributions from their employer. Employees who take advantage of this would be compliance tested separately.
  • How it works: At a high level, there are three things to know.
    • Employees are required to certify that they made loan payments. They do not have to show proof of payments if the employer doesn’t require it. An employer can rely on employee certification alone.
    • Matching contributions must vest on the same schedule as salary deferral matching contributions.
    • Employers can make matching contributions less frequently than salary matches, although contributions must be made at least once a year.

Understanding the costs of a 401(k) match on student loan payments

First, let's take a wider view of cost. Replacing a single employee may not directly show up on your company’s financial statements, but it's expensive, no matter the company, especially if it happens more than once.

  • One report by SHRM cites employee replacement costs as being six to nine months of an employee’s salary.
  • Another report by Gallup cites one-half to two times the employee's annual salary.

Employee replacement costs to consider include:

  • Hard costs: These are straightforward to quantify and include hiring costs like HR staff, technology, and job postings. Once an employee is hired there are also hard costs like onboarding training, new equipment, and processing paperwork.
  • Soft costs: These can be murky to measure but impact every hiring decision. These include the time spent by employees who help with the hiring process, from interviews to position description reviews and onboarding planning. As a new employee joins the company, these costs continue with additional onboarding meetings and lowered productivity as the new team member gets up to speed.

Now that you’ve considered the real costs of recruiting and onboarding a new employee (vs. retaining a good team member), we can talk about the cost of this new 401(k) match.

Provision implementation costs may include:

  • Participant Fee: If you are using a modern 401(k) tech platform, these costs are minimal often ranging from $5 to $10 per month. You can also consider passing these small costs on to the employee.
  • Nondiscrimination testing: Depending on your 401(k) provider, an increase in participants may result in increases in fees for additional compliance testing. (Note: At Betterment at Work, there are zero additional compliance testing fees if your plan has an increase in participants.)
  • Matching contribution costs: If more employees use the 401(k), contributions may increase, although some companies may have already budgeted for a portion of these in their overall 401(k) match budget.
  • Administrative costs: Tracking self-certifications requires implementing a process. This can be reduced if your company leverages technology to streamline this workflow.

There are costs to administering the 401(k) student loan match provision. But compared to losing a talented employee, provision costs may be far less. Think of the match benefit as an investment in talent.

Calculating ROI of a 401(k) match on student loan payments

It’s important to note that when calculating ROI for your company, you should take into consideration each employee’s unique value and the costs associated with replacing their role.

To help illustrate, consider the following hypothetical example of an employee making $75,000 at a company offering a 6% 401(k) match.

Estimated replacement costs: $37,500 to $150,000 one-time cost

  • An employee making $75,000 could cost between $37,500 and $150,000 to replace using the benchmark of one-half to two times the employee's annual salary.

Estimated 401(k) student loan match costs: $4,620 to $5,000 per year

  • If that employee uses the 401(k) student loan matching program with a 6% match, the employer would pay $4,500 in matching contributions.
  • We’ll add on $120 per year in estimated monthly participant plan fees plus potential administrative costs estimated at a few hundred dollars to process and test this employee’s student loan match.

We see that with a full employer match plus administrative fees, we are still not even close to the costs associated with needing to replace the employee. It would take over seven years in 401(k) matching costs to reach the low-end cost of replacing the employee. That’s without considering the value a satisfied, tenured employee brings in workplace production, institutional knowledge, cultural contributions, and more.

We’re here to help you build a better 401(k) plan

At Betterment, our modern 401(k) platform helps streamline your administrative processes. We’ve designed 401(k) student loan payment matching to be seamless and simple for you and your employees.

Whether you want to learn more about how 401(k) student loan matching can work for you, or you have additional questions about our 401(k) platform, we can help. Reach out today.

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