There’s new guidance from the Internal Revenue Service that would allow employees struggling with student loan debt who are unable to save for retirement to still get some of the benefits of 401(k) contributions.
Sounds like a dream come true in Clark Howard’s world, right?
But it turns out the money expert is less than enthusiastic about the new rules because he feels they’re taking people in the wrong direction.
Why Clark Howard opposes new rules about 401(k) contributions
We hear endlessly about the $1.4 trillion student loan debt that saddles young people with nearly untenable financial obligations for their education.
These obligations can delay home ownership, cause people to put off getting married and put a real drag on living life in general.
Furthermore, when young employees get their first job, they often find they can’t contribute to the company 401(k) plan because their student loans leave little financial breathing room in their lives.
But the problem here is they don’t just miss out on making contributions to save for their future; they also miss out on the very important company match, which is offered by many employers as a job perk.
When you think about it, a company match is like free money. And if you're not getting your full company match, then you're missing out on an average of $1,336 of free money each year, according to new research from Financial Engines.
Of course, millennials who are heavily indebted because of education aren't the only ones missing out on company matches. Vanguard's How America Saves 2018 study found that around 33% of retirement savers of all ages don't save enough to get 100% of their employer's match.
But now a new ruling from the IRS would clear the way for employers to treat student loan payments as if they were contributions made to the company 401(k).
That way, younger employees with student loan debt would still be eligible to get the company match — without actually making any 401(k) contributions in the first place!
The thinking is that at least you have some money going toward retirement while you focus on paying down those student loans.
However, Clark Howard thinks the new IRS guidance is shortsighted.
"I actually think this is a step back, not forward. When an employer offers a match on a 401(k), even if you're facing a mountain of student loan debt, I want you contributing enough to trigger that full match."
Clark notes that he offers his own employees a dollar-for-dollar match up to 6%…and he makes 6% participation the plan the default when you work from him.
So, automatically, all of Clark’s employees are contributing an effective 12% of their pay — their 6% plus his 6% — unless they deliberately opt out of his minimum contribution policy.
So far, no one has done that!
“I know student loans have a death grip on so many people’s lives. But I don’t want you to divert from doing something basic, which is being in the habit of putting enough money into your 401(k) to grab that match money wherever you work,” Clark says.
“[These new IRS rules] are giving you a hall pass that takes you the wrong way. I think you should contribute to your 401(k) up to the match and pay on the student loans at the same time to the best of your ability.”
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