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A Top Barrier to Retirement Saving: Education Costs

Industry Trends and Research

A quarterly tracking survey of experienced investors finds that education costs are having a significant impact on young investors’ ability to save for retirement, but legislative relief could be coming soon.  

According to the results from E*TRADE from Morgan Stanley’s most recent wave of StreetWise, the No. 1 reason Millennial and Gen Z investors take early withdrawals from their retirement savings account is to pay for education. 

When asked whether they’ve ever taken out money from an 401(k) or IRA before the age of 59-1/2, 49% of respondents under age 34 indicated they have done so. The top reason for doing so was to pay for education costs, followed closely by a medical emergency: 

  • education (20%)
  • medical emergency (19%)
  • to make a large purchase (18%)
  • became unemployed (15%)
  • to spend on myself or family (11%)
  • to spend on a vacation (7%)

Similarly, when asked about the top barriers impacting their personal ability to save for retirement, health care costs (65%) topped this question, but nearly two-thirds of young investors (63%) also cited education costs or paying down student loans. 

These young investors are still focused on saving for retirement, however, as having access to a retirement plan was cited as the most important benefit a potential employer could offer, but they also are looking for help with educational costs. In this case, E*TRADE from Morgan Stanley found that more than 4 in 10 (41%) young investors said education reimbursement was one of the top three benefits an employer could provide beyond traditional health insurance:

  • retirement plans (61%)
  • insurance other than health (e.g., life, legal and auto) (60%)
  • education reimbursement (41%)
  • in-office or digital financial wellness seminars (32%)
  • student loan refinancing (29%)
  • commuter benefits (26%)
  • gym discounts (21%)

“The rise of education costs has been a pervasive challenge, so it’s no surprise to see the toll it has taken on young investors,” notes Mike Loewengart, Managing Director of Investment Strategy at E*TRADE from Morgan Stanley. “While drawing down on retirement savings may be tempting when you have a long runway to retirement, young investors lose out on the power of compounding. Further, early withdrawals can come along with penalties, so understanding the magnitude of the decision is critical.”

Relief Coming Soon?

While it might not qualify as “education reimbursement” as cited above, relief could be coming soon on the legislative front with respect to student loan repayments. 

Both the House-passed SECURE 2.0 legislation and the Senate Finance Committee-passed EARN Act include similar provisions to allow employers to provide matching contributions under 401(k) and other tax-preferred retirement plans for employee student loan payments as if those payments were elective deferrals. 

The policy thinking behind the proposals is to assist those employees who may not be able to save for retirement because they are overwhelmed with student debt, and thus, are missing out on available matching contributions from their retirement plans. 

Employers would be permitted to make matching contributions under a 401(k), 403(b) or 457(b) plans and SIMPLE IRAs with respect to qualified student loan payments for higher education expenses of the employee. 

For purposes of nondiscrimination testing applicable to elective contributions, the legislation permits a plan to test separately the employees who receive matching contributions on student loan payments. The latest version of the legislation addresses a problem that the American Retirement Association had identified about the impact this new retirement plan design feature could have with the average deferral percentage (ADP) test applicable to 401(k) plans. With that problem addressed, small businesses will not have to worry that this benefit puts their retirement plan testing at risk. 

One thing that will have to be worked out is that, under the House’s SECURE Act 2.0, the provision is effective for contributions for plan years beginning after 2022, while the EARN Act provision would be effective for contributions for plan years beginning after 2023. It’s anticipated that the House and Senate will move to finalize the legislation later this fall with a year-end deadline for passage.

E*TRADE from Morgan Stanley’s 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 age 34 data set comprised 269 investors. 

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