Participants Should Not Pay Off Student Loan Debt Early

HelloWallet found paying down student loans ahead of schedule leads to a lower net wealth at retirement.

To answer the question, “Should workers prioritize paying off student loans ahead of schedule or prioritize saving for retirement,” HelloWallet analyzed its own user data and the Survey of Consumer Finances, a nationally representative survey conducted the by the Federal Reserve.

After controlling for age and income in HelloWallet’s user data, one additional dollar of student loans was associated with a $0.17 decrease in retirement savings, and in the Survey of Consumer Finances, one additional dollar of student loans was associated with a $0.35 decrease in retirement savings. “There are a number of reasons why the results differed slightly—HelloWallet’s users are not representative of the working population of the United States, for example—but the fact that these two data sources are directionally similar is certainly suggestive of student loans crowding-out retirement savings,” says Jake Spiegel, a researcher at HelloWallet.

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HelloWallet also built an illustrative model to examine the impact of the decision to pay off student loans ahead of schedule and found there are very few circumstances in which paying down student loans ahead of schedule leads to a higher net wealth at retirement, particularly if a worker receives an employer match on retirement savings. A hypothetical 25-year -ld worker making $50,000, paying off a $20,000 loan, and receiving a 5% match on their retirement savings can accumulate 15% more savings at retirement if they focus on saving for retirement instead of waiting to save for retirement and dedicating all of their discretionary dollars toward paying off their loans ahead of schedule.

“Even if expected returns in the stock market are lower than the interest rate on the loan, saving for retirement wins out. This is because retirement savings, particularly for a young worker, will compound over a long time horizon. Furthermore, interest on student loan debt is tax-privileged for single workers earning less than $80,000,” notes Spiegel.

According to HelloWallet’s research report, in 1992, 10% of all households in the United States held education loans, which doubled by 2013. The average loan amount has increased from $9,400 to $27,300.

The research report may be downloaded from here.

ESOP Attorney Restricted in Advising Plan Fiduciaries

Johanson agreed to some of the broadest restrictions the department has sought to date on an attorney's ability to advise parties concerning transactions that involve employee benefit plans covered by ERISA, the DOL says.

A federal judge has entered a consent order expanding substantially the scope of a previous judgment and order between the U.S. Department of Labor (DOL) and attorney David R. Johanson, former chair of The ESOP Association’s advisory committee chairs council and ex-officio member of the board of directors, and his prior law firm, Johanson Berenson LLP, arising from their involvement in three Mississippi cases.

This judgement settles the department’s allegations that Johanson and his prior law firm committed contempt of the previous consent order. Johanson’s alleged contempt arose from a lawsuit, brought to establish insurance coverage of an Employee Retirement Income Security Act (ERISA) enforcement suit in which the department had sued Herbert Bruister and others under ERISA for various breaches of fiduciary duties that caused $6.5 million in losses to pension plans of Bruister & Associates Inc.

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According to the ERISA lawsuit, during a three-year period, from December 2002 to December 2005, Bruister, the sole owner of BAI, sold 100% of BAI’s shares to the plans for $24 million. Bruister and other plan fiduciaries engaged in prohibited transactions by causing the plans to pay excessive prices for BAI stock purchased from Bruister. For each purchase, the fiduciaries used flawed valuations prepared by Matthew Donnelly and his firm, Business Appraisal Institute.

The court found Bruister and Johanson went so far as to fire the initial attorney representing the plans because that attorney was too thorough. Moreover, the court found that Bruister and Johanson exercised undue influence over Donnelly’s valuations, and that as a result, Donnelly was not sufficiently independent to provide valuations for the plans.

In the insurance suit, Johanson represented Bruister, as trustee of the Bruister and Associates Inc. pension plans, as well as those pension plans themselves. In doing so, he allegedly violated an original consent order, which prohibited him from representing any party other than the plan in a transaction involving a plan.

In the expanded consent order, Johanson agreed to some of the broadest restrictions the department has sought to date on an attorney’s ability to advise parties concerning transactions that involve employee benefit plans covered by ERISA, the DOL says.

The order also requires Johanson to disclose to certain clients specific limitations regarding his representation. In addition, in an out-of-court financial settlement, Johanson and his prior law firm will pay at least $2.5 million in restitution for the benefit of the pension plans of Bruister & Associates Inc.

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