Retirement plan sponsors who have millennial employees are often told that student loan debt prevents those employees from participating in a retirement plan. However, some research suggests that millennials may be better served by prioritizing retirement savings over student debt.
According to the Wall Street Journal, the Class of 2016 has graduated with the highest amount of student debt in history, an average of $37,172.1 With that much debt, it’s easy to understand why millennials may focus on reducing it and delay retirement savings. However, a 2016 analysis from HelloWallet argues that, in fact, millennials would be better served by contributing extra dollars to their retirement plans instead of paying off student loans ahead of schedule, particularly if their employer offers a match on contributions.2 The study modeled a wide range of retirement saving vs. student loan payment scenarios, and found that paying off student debt instead of saving for retirement generally resulted in a lower net wealth at retirement age. Part of the reason is that employer matching is “free money,” which immediately provides a guaranteed return on investment for a participant’s contribution. Another part of the reason is compounding.
Younger savers have more time for their contributions to grow through compounding, and millennials lose the advantage of time if they prioritize paying off student loans over saving for retirement. In addition, savings in a qualified plan are tax-deferred, which allows more of the participant’s money to go into the plan, rather than be “lost” to taxes.
That’s why we leverages the power of The Participant EffectSM to give the employees of retirement plan sponsors appropriate strategies for saving and retirement. In this case, a myopic focus on student debt could prevent millennials from taking steps now that would help them reach a successful retirement. The Participant EffectSM uses behavioral finance to determine why employees don’t always make the best decisions and provides strategies that turn weaknesses into strengths. Find out how FiduciaryFirst can help your participants pursue their retirement goals by calling us at 866-625-4611.
Tracking Number: 1-557163 This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, the plan sponsor will be in compliance with ERISA regulations.
1 http://blogs.wsj.com/economics/2016/05/02/student-debt-is-about-to-set-a...
2 http://info.hellowallet.com/rs/206-RGJ-096/images/HelloWallet%20-%20Are%...
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