Why The 401(k) Doesn’t Build Loyalty And Attract Workers Like it Used To
August 12, 2015

Why your 401(k) isn’t stopping your employees from exiting your workforce.

401(k)s are nice, but they just aren’t relevant to younger workers anymore. The reason: Crippling student loan balances. With the average graduate with student loans now leaving school with an average debt now topping $35,000, our current college graduates start their careers deeper in hock than any other generation before them by far. The monthly nut that today’s crop of college graduates have to make to cover payments on $1.27 trillion dollars in debt and counting, is making itself felt in the broader economy: Studies have shown that over half of Americans between the ages of 18 and 29 have put off a major life event or milestone because of their student loan burden.

These young Americans are working hard – but increasing numbers of them report they have put off buying houses, buying a car, getting married, having children, and/or saving for retirement because of their student loan burden, which at once depresses their net worth and their ability to qualify for credit.

That’s the central finding of the Bankrate Money Pulse Survey, taken between July 9th and 12th of this year.

The delays aren’t unique to the under-30 crowd, either. Similar percentages numbers of the 30-49 year old demographic reported that they, too, had been forced to put off buying a home, having children or saving for retirement because of student loan debt, though only about 10 percent of them reported delaying getting married or having children.


Congratulations, new graduate! On average, your student loan bill will be $35,000.

It’s not that they’ve been irresponsible. A different Bankrate survey recently found that millennials under age 30 were the most likely demographic to have saved at least three to five months of expenses. In this regard, they are doing better than the 30-somethings and 40-somethings.

Of course, that’s a bit easier to do when you don’t have a mortgage or car payment and insurance to cover every month.

The fact is that many benefits that employers have used for years to differentiate themselves from other employers and to give them an edge in attracting and retaining talent are not relevant to today’s millennial, graduating and even entering their 30s with tens of thousands and sometimes hundreds of thousands of dollars in student loan debt.

What good is a 401(k) match, after all, when every dollar of what would otherwise be investable income is diverted to pay a non-bankruptable student loan bill?

It’s time to rethink the employee benefits package for these younger educated workers.

Government Employers Are Already Offering This Benefit

For those young graduates willing to enter public service, there are programs available that help speak to them, specifically. For example, each of the military services offers a robust student loan repayment benefit to attract college graduates. And the Consumer Financial Protection Bureau has asked public service employers nationwide to help them pay off student loans, via programs like Public Service Loan Forgiveness. Under this program, workers have to make qualifying payments for 120 months, or ten years. After that time period, any federal student loan debt remaining is forgiven.

The federal Office of Personnel and Management authorizes agencies to make qualifying student loan payments of up to $10,000 per year on employee’s behalf, up to $60,000 per employee.

These payments made on behalf of employees are generally considered income. Employers should report it as compensation on annual W-2 forms.

The Department of Justice, for its part, offers a student loan repayment for qualifying attorneys remaining with the Department for at least three years. Their annual benefit is up to $6,000 per year, up to a maximum of $60,000 per employee.

The Challenge to Employers

Employers who want to reach young college-educated talent must think beyond health insurance and the 401(k) to be competitive. As we mentioned, the 401(k) match is not very relevant to young workers who can’t save enough to earn out the match. And now that the Affordable Care Act is law, just about every large employer must offer qualifying health benefits. Either that or the worker can enroll during the open enrollment period on a guaranteed-issue basis. It’s tough for an employer to differentiate themselves on that basis.

We Need Something More Relevant for Young People

The fact is that today’s crop of college graduates has a debt burden that is twice as high as their forebears 20 years ago, even adjusting for inflation. The 401(k) plan, for too many of them, is a pipe dream – at least for now, when they’re trying to pay down massive student loans on their entry-level or junior salary levels. In 10 or 15 years or so, they may be looking more at retirement savings, and 401(k) plans may be a more relevant incentive for them. But until then, these workers are just trying to get by. A meaningful student loan repayment program would be a godsend – and a powerful differentiator for the employer in the tough marketplace for talent.

Other private sector employers have offered student loan repayment assistance on an ad hoc basis. But Flex395 is among the first to structure them on an employer benefits platform, with an opportunity for the employer to place their ‘brand’ on the program and set it up as an employer-sponsored benefit much like any other voluntary benefits program with a contribution component.

Enter the Employer-Sponsored Student Loan Assistance Plan.

While similar programs in government and non-profits have existed for some time, these programs are rapidly gaining traction in the private sector as well, as companies begin to respond to overwhelming demand from millennial employees. Case in point: A new student loan benefits product called Flex395 just rolled out this spring, which give private sector employers the ability to contribute directly to student loans, paying them down directly on employees’ behalf, just as they might provide 401(k) matching contributions.

Before you can build loyalty among your employees by getting them to make contributions to your retirement plan, you have to get their heads above water first!

This is usually a much more useful benefit for recent college graduates than retirement plans to which they cannot yet afford to contribute. The idea: To assist workers, of course, but also to differentiate the employer from the herd. Hiring managers can use platforms such as Flex395 as a hiring and retention tool to give them a leg up over other competitors in the marketplace.

“Young people neither willingly adopt nor care about 401(k) products,” asserts Brendan McQueen, Flex395’s founder and CEO. “We’re introducing this product as an alternative or addition to products from companies like Prudential, Fidelity or Vanguard. The question is not whether 401(k)s are beneficial – of course they are – but rather what benefits employers can offer that are most relevant and attractive to young, talented employees.”

Employer contributions to programs such as this do not yet have the advantage to the employee of tax deferral, like 401(k) and SIMPLE contributions do. Employer payments are taxable to the employee. Qualification and matching criteria are the employer’s to determine.

Private sector repayment programs like this one may finally give private sector employers a meaningful way to compete with government agencies for talent besides direct cash compensation. And because the platform costs little or nothing to set up for the employer, it’s also easy for smaller employers to set up a meaningful program that is more relevant to younger workers struggling with student loans than many larger employers.