Should Clients Be Preparing to Pay Student Loan Debt in Retirement?

A GAO analysis finds the number of borrowers, especially older borrowers, who have experienced offsets of Social Security benefits to repay defaulted federal student loans has increased over time.

While many studies report about the burden of student loan debt on Millennials and how this may affect their retirement savings, an Aon Hewitt study found student loan debt and the associated consequences are issues that span generations, with 44% of Millennials reporting having student loans along with 26% of Generation Xers and 13% of Baby Boomers.

Now, a report from the Government Accountability Office confirms that student loan debt can follow Americans into retirement and affect their retirement income.

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GAO says older Americans—those in or approaching retirement—and other borrowers who default on their federal student loans are subject to a number of actions to recover outstanding debt, including Social Security offsets. In fiscal year 2015, 49.7% of collections of defaulted student loan debt was generated from offsets of federal payments through the Treasury Offset Program, including but not limited to Social Security offsets.

GAO’s analysis of data from Education, Treasury, and the Social Security Administration (SSA) shows that the number of borrowers, especially older borrowers, who have experienced offsets of Social Security benefits to repay defaulted federal student loans has increased over time. From fiscal years 2002 through 2015, the number of defaulted federal student loan borrowers of any age with Social Security offsets increased from about 36,000 to 173,000.

NEXT: Student loan offsets bite into retirement income

About 44% of borrowers 50 and older at the time of their initial offset saw the maximum possible amount of their Social Security benefit withheld, equal to 15% of their benefit payment. The offset for the remaining 56% was less than the maximum 15% of their benefit payment. Most of these borrowers had between 10% and 15% of their benefit payment offset.

Older borrowers who remain in offset may increasingly experience financial hardship. Such is the case for a growing number of older borrowers whose Social Security benefits have fallen below the poverty guideline because the offset threshold is not adjusted for increases in costs of living. In fiscal year 2004, about 8,300 borrowers in the 50 and older age category had benefits below the poverty guideline compared to almost 67,300 in fiscal year 2015. As a share of borrowers in the 50 and older age category, this growth was equivalent to an increase from 38% in fiscal year 2004 to 64% in fiscal year 2015. In addition, a growing number of these older borrowers already received Social Security benefits below the poverty guideline before offsets further reduced their income.

The GAO noted that nearly one-third of older borrowers were able to pay off their loans or cancel their debt by obtaining relief through a process known as a total and permanent disability (TPD) discharge, which is available to borrowers with a disability that is not expected to improve.

The GAO suggests that Congress consider adjusting Social Security offset provisions to reflect the increased cost of living. It is also making five recommendations to Education, including that it clarify documentation requirements for permitted relief resulting from disability. Education generally agreed with GAO's recommendations.

The GAO report may be downloaded from here.

ERISA Lawsuit Filed Against Starwood Hotels

The case questions the hotel chain's 401(k) plan fees and investment choices.

A class action complaint has been filed against Starwood Hotels & Resorts Worldwide, Inc. accusing it of serially breaching its Employee Retirement Income Security Act (ERISA) fiduciary duties in the management, operation and administration of its employees’ 401(k) plan, the Starwood Hotels & Resorts Worldwide, Inc. Savings & Retirement Plan.

The complaint notes that the United States Supreme Court held in Tibble v. Edison International that plan fiduciaries have an ongoing duty to monitor investments. Participants allege that Starwood had the bargaining power to obtain and maintain low fees. However, Starwood did not exercise this power for many years. At about the same time as the Tibble decision, Starwood managed to cut the fees of its fund offerings in half. Fees were reduced an average of 40 basis points (.40%). This means that for the prior five years, an unnecessary $20 million in fees were incurred by plan participants—40 basis points times $1 billion in assets equals $4 million per year in excess fees or $20 million over a five year period, the plaintiffs calculate.

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The lawsuit also cites a survey by NEPC, an independent investment consulting firm, which found that the median recordkeeping costs of 113 plans was $64 per plan participant in 2015. The Starwood Plan has consistently averaged recordkeeping and administrative fees that are close to $100, more than 50% higher than the median cost of $64. As a Plan with assets well over $1 billion, Starwood could have negotiated substantially lower recordkeeping and administrative fees, the participants allege.

The complaint also states that Starwood engaged in the practice of revenue-sharing with the investment funds it offered plan participants. This means that funds paid Starwood monies for their inclusion in the investment menu. However, Starwood does not disclose the amount of revenue sharing it received.

NEXT: Ignoring investment allocations and no stable value fund

For one named plaintiff, the complaint says he elected to have his contributions diversified over six separate funds, but Starwood ignored that directive and put 100% of his money into a single fund, the BlackRock LifePath 2050 Index Fund. For five years, Starwood completely ignored the participant’s instructions and instead put 100% of his money into a fund where he designated that 0% be invested, the lawsuit alleges. In 2016, Starwood finally put 12% of the participant’s money into the six funds that he had selected, but still left 88% of his money in the LifePath 2050 Fund that he had not even selected. “Plaintiffs are informed and believe that Starwood failed to employ reasonable and prudent mechanisms to ensure that investment allocation decisions of participants were followed,” the lawsuit says.

Starwood is also accused of allowing participants to incur a double layer of fees for investments. For example, the BlackRock Life Path 2050 Index Fund institutional shares have net operating expenses of .20%. The 2050 Index Fund is a fund that invests all of its assets in other BlackRock funds; 52% of the Life Path Index Fund was invested in the BlackRock Russell 1000 Index Fund now known as the BlackRock Large Cap Index Fund. The Russell 1000 Index fund had net operating expenses of .08%. Thus, the fee paid by Plan participants is .20% plus .08% for a total of .28%. In contrast, the complaint says, the Vanguard Institutional Index Fund Institutional Shares has a total expense ratio of only .04% so the plan has chosen funds with fees that are 700% more than the comparable Vanguard fund—a difference of 24 basis points. Twenty-four basis points on $280 million in assets equals $4 million in excess fees over six years, the plaintiffs calculate.

Finally, the participants say by failing to offer a stable value fund as an investment option in addition to a money market fund, Starwood failed to fulfill its fiduciary duties to participants to offer them a reasonable and adequate array of investment choices. The complaint notes that as of December 31, 2015, the plan had $133 million invested in a money market fund which only earned .65% a year. It offered no stable value fund at all. A stable value fund would have provided essentially the same level of risk as a money market while delivering much better return. For example, Vanguard offers the Battelle Stable Value Fund which has had a five year return of 2.94%, or 2.29% more than the Starwood’s Plan’s money market. An enhanced performance of 2.29% on $133 million over six years equals lost income to plan participants of $18 million, the plaintiffs say.

“As the result of the foregoing conduct and omissions by Starwood, Plaintiffs and all persons similarly situated have sustained monetary losses in an amount to be determined at trial, but believed to be well in excess of $25 million,” the complaint states.

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