401(k) advisers see student loan benefits as next 'evolution'

IRS points way toward coupling repayment programs with employer retirement plans

Aug 24, 2018 @ 1:54 pm

By Greg Iacurci

Increasing student loan debt has drawn the attention of retirement plan advisers interested in finding ways to couple 401(k) plans and student loan repayment programs. A young employee may not be able to save for retirement while paying down student loans, after all.

"Student debt is such a huge issue for this generation coming into the workforce that we have to figure out ways to help them," said Nate White, managing principal at SLW Retirement Plan Advisors.

And yet, there's been a degree of reluctance, in part because 401(k) plans must satisfy "contingent benefit rules." Those prohibit employers from making 401(k) participation a prerequisite to receiving other benefits — in this case, a student loan benefit.

However, the Internal Revenue Service recently offered a glimpse into how advisers may be able to couple the benefits without running afoul of tax rules.

In a private letter ruling, the IRS affirmed one employer's approach: Allow employees to choose whether they'd prefer a 5% contribution from the employer to be in the form of a 401(k) match or a student loan repayment. Employees would receive the contribution regardless of whether or not they are contributing to the retirement plan.

"I think it's awesome," Aaron Pottichen, SVP of retirement services at Alliant Retirement Consulting, said of the IRS ruling. "There's not a lot of evolution in 401(k)s. This could be the next thing that may be a big evolution."

Vendors such as Fidelity Investments, SoFi and Student Loan Genius have debuted products that allow employers to help employees pay down student debt, but they are not tied to the company 401(k) plan.

The approach unveiled by the IRS' private letter ruling seems preferable in some ways, advisers said. One big improvement: Employers wouldn't have to increase the amount of money they spend on benefits, since an employee chooses to divert the employer money either toward retirement or student loans.

Being able to facilitate such a plan design for 401(k) clients also could be a competitive advantage for advisers.

"There's no doubt there's interest in doing this," Mr. White said. Clients have been asking him about student loan benefits for the past three years, he said.

It's no secret that student loans have become a major concern. Debt from student loans in the U.S. stood at $1.41 trillion at the end of June. It's now the second-largest source of household debt, after housing. Average loan balances also have crept upward.

Of course, a private letter ruling from the IRS doesn't amount to concrete guidance — it only applies to the specific plan that requested the ruling in the first place. Absent some sort of official guidance, regulation or legislation on the plan design, advisers generally say they'd shy away from implementing anything with clients at this point.

However, advisers think the development is a positive, and signals that some sort of official stance could be coming down the line.

"How often do you see the IRS giving someone flexibility?" Mr. Pottichen said. "Not a lot."

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