A new T. Rowe Price white paper published today focuses on how the primary sources of financial stress—specifically, the lack of emergency savings and the burden of student loan debt—can negatively affect an individual’s retirement savings.
Additionally, the paper provides insights on how provisions in the recently passed SECURE 2.0 Act retirement legislation could help with these challenges. The findings are based on multiple studies conducted by T. Rowe Price, with a focus on the firm’s annual Retirement Savings and Spending study, which surveys a national representative group of 401(k) participants.
“Short-term financial responsibilities can be a significant source of financial stress and a potential barrier to saving for retirement,” said Rachel Weker, vice president, senior retirement strategist at T. Rowe Price. “But postponing retirement saving and taking repeated loans or hardship withdrawals can really damage financial wellness.”
Weker said employers can implement meaningful changes that could have a positive impact on retirement savings for many Americans by helping to address these shorter-term financial challenges. “SECURE 2.0 provides sponsors additional options to consider for their financial wellness programs.”
More details on the specific SECURE 2.0 provisions that could improve retirement savers’ financial wellness, including provisions on emergency savings and student loans, as well as more insights from T. Rowe Price’s annual study can be found here.
Key insights from the Retirement Savings and Spending survey featured in the paper include:
- 55% of survey respondents stated that they are not saving enough for retirement or are not sure if they are. Among these respondents, 62% indicated that they were saving all they could afford.
- 14% of respondents stated that they were likely to tap into their workplace retirement accounts to cover emergency expenses. The survey also found that respondents who took multiple small loans and hardship withdrawals had significantly lower contribution rates and lower retirement plan account balances than their peers who did not take loans or hardship withdrawals.
- 10% of respondents who took two or more loans also had taken hardship withdrawals. These workers had an average account balance of $26,000, about one-quarter of the account balance of their peers with no loans.
- Among those surveyed, roughly one in four reported that they had outstanding college debt. Retirement savers with student loans had lower average contribution rates than those without loans.
Among SECURE 2.0’s 92 provisions are one that allows the treatment of student loan debt payments as elective deferrals for purposes of capturing the matching contribution. This removes the difficult decision for many student debt loan payers of whether to make a loan payment or contribute to their plan to capture the employer match. In the past, this decision has resulted in many participants missing out on the company match.
Another provision allows participants to save in designated emergency savings accounts. These provisions address the reality of unforeseen emergencies wherein many Americans may not be able to afford the corresponding expense(s).
SEE ALSO:
• SoFi at Work Launches Student Loan Debt Repayment Service
• Emergency Savings and Retirement Planning Tightly Linked
• Automatic Enrollment Adoption Grew to 85% in 2022: T. Rowe Price
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.