A small percentage of U.S. companies — including PwC, Fidelity, and Aetna — have stepped up to help their employees cope with the education loans weighing them down by offering them cash to help them reduce their debts. While I applaud them, one downside of their approach is simply giving their workers cash raises their income taxes, diminishing the impact of their efforts.
To address this dilemma, Abbott, where I lead Human Resources, took a different approach. We introduced a program last August to contribute 5% of pay to a tax-deferred 401(k) plan for full- and part-time workers who direct at least 2% of their pay toward paying down their student loans. The Internal Revenue Service reviewed — and ruled favorably on — the 401(k) plan structure we came up with to make this possible.
In addition to the tax issue, our program — called Freedom 2 Save — helps tackle another problem: two-thirds of millennials aren’t saving for retirement. For every decade a person delays saving for retirement, the amount he or she ultimately needs to save doubles. Unless they start putting aside money now, many graduates will have to work into their 70s.
Over 10 years, an employee with a starting salary of $70,000 could earn $54,000 in his or her 401(k) account — assuming a 6% annual return and yearly pay increases of 3% — without contributing a dime toward retirement. Thanks to the power of tax-deferred investment returns, that amount could grow to hundreds of thousands of dollars by the time he or she turns 60.
Freedom 2 Save offers Abbott a number of benefits. We believe that it will easily pay for itself by helping us retain employees — a big deal in an era where millennial turnover alone costs businesses more than $30 billion every year. (Ninety percent of young workers say they’d commit to a company for five years if it gave them some loan relief, and workers with student debt stay at their jobs 36% longer if employers help pay off loans.) In addition, it will help take a load off of workers burdened by debt who say the resulting stress negatively impacts their job performance.
Americans are carrying a record $1.5 trillion in student loan debt, a sum that has more than doubled in the past decade and now surpasses our nation’s level of credit card debt. The typical graduate leaves school owing about $40,000. Many face larger burdens. About 2.5 million Americans have debt loads in excess of $100,000.
So far, 400 Abbott employees have signed up for the Freedom 2 Save program. Once it is well-established, we anticipate thousands will take advantage of it.
Although we’re the first company to work with the IRS to structure a program like this, it’s possible that more companies will be able to do something similar with time. (An employer group has asked the IRS commissioner to expand the ruling it gave us to all companies.)
There are no easy or universal solutions to America’s student debt crisis. But as employers, we are in a unique position to come up with innovative benefits that have a tangible positive impact on employees’ lives. By increasing our ability to recruit and retain the best people, such efforts are highly worth it.
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