A quarterly tracking survey of experienced investors finds education costs have a significant impact on young investors’ ability to save for retirement, but legislative relief may be coming soon.
According to E*TRADE results from the latest wave of Morgan Stanley’s StreetWise, the number one reason millennials and Gen Z investors make early withdrawals from their retirement savings account is to pay for their studies.
When asked if they had ever withdrawn money from a 401(k) or IRA before age 59½, 49% of respondents under age 34 indicated that they had done it. The main reason for doing so was to pay tuition, closely followed by a medical emergency:
- education (20%)
- medical emergency (19%)
- make a major purchase (18%)
- become unemployed (15%)
- spend on me or my family (11%)
- spend on holidays (7%)
Similarly, when asked about the top barriers impacting their personal ability to save for retirement, healthcare costs (65%) topped this question, but nearly two-thirds of young investors (63 %) also cited tuition fees or repayment of student loans.
However, these young investors are still focused on saving for retirement, as access to a pension plan was cited as the most important benefit a potential employer could offer, but they are also looking for help with scholarship fees. In this case, Morgan Stanley’s E*TRADE found that more than 4 in 10 young investors (41%) said that education reimbursement was one of the top three benefits an employer could offer beyond the job. traditional health insurance:
- pension plans (61%)
- non-health insurance (e.g. life, legal and auto) (60%)
- education reimbursement (41%)
- in-office or digital financial wellness seminars (32%)
- student loan refinance (29%)
- benefits for commuters (26%)
- discounts for gyms (21%)
“Rising education costs have been an ever-present challenge, so it’s no surprise to see the toll it’s had on young investors,” notes Mike Loewengart, chief investment strategy officer. at Morgan Stanley’s E*TRADE. “While it can be tempting to dip into retirement savings when retirement is long, young investors are losing the power to capitalize. Additionally, early withdrawals can come with penalties, so understanding the magnitude of the decision is key.
Soon the relief?
While it may not qualify as an “education refund” as noted above, relief may soon be coming to the legislative front when it comes to student loan repayments.
The SECURE 2.0 legislation passed by the House and the EARN law passed by the Senate Finance Committee include similar provisions allowing employers to provide matching contributions under 401(k) and other tax-advantaged retirement plans. employee student loan payments as if these payments were optional. reports.
The policy idea behind the proposals is to help employees who may not be able to save for their retirement because they are overwhelmed with student debt and therefore do not benefit from available matching contributions from their pension plans.
Employers would be allowed to make matching contributions under 401(k), 403(b), or 457(b) plans and SIMPLE IRAs with respect to qualifying student loan repayments for higher education expenses of the employee.
For the purposes of non-discrimination testing applicable to voluntary contributions, the legislation allows a plan to separately test employees who receive matching contributions on student loan repayments. The latest version of the legislation resolves an issue the American Retirement Association had identified regarding the impact this new retirement plan design feature could have with the Average Deferral Percentage (ADP) test applicable to 401(k) plans. ). Once this is resolved, small businesses will no longer have to worry that this benefit will jeopardize their pension plan tests.
One thing that will need to be resolved is that under the House’s SECURE 2.0 Act, the provision applies to contributions for plan years beginning after 2022, while the EARN Act provision would apply to contributions for with the regime years beginning after 2023. The House and Senate are expected to move to finalize the legislation later this fall with a year-end deadline for its passage.
The Morgan Stanley E*TRADE survey was conducted by Dynata from April 1-11, 2022, among a sample of 913 self-directed active investors who manage at least $10,000 in an online brokerage account. The under-34 dataset included 269 investors.