Fidelity piloted 'free-money' 401(k) matches for eight years before going live last year; now Schwab is 'bolting-on' a third-party gizmo and imitating its rival with the launch of its own program

Fidelity Investments just got a small challenge and a big endorsement of its new 401(k) program to get “free money” to people with negative net worth.

Charles Schwab Corp. just announced it will follow that lead, though a third-party vendor will carry the ball.

The Boston-based recordkeeping giant launched the feature that lets employers bestow “401(k) matching funds” that in fact pay down student debt – looping in literally millions of young employees otherwise sidelined before the SECURE  2.0 Act allowed it.

Schwab announced its own program on April 29th in concert with Candidly, a 2016 startup.

What makes the program so easy to like is that it could boost everyone from Fidelity and Schwab into the U.S. retirement world, says Louis Harvey, president at Dalbar, a market research firm in Boston.

“From the business perspective, Fidelity adds value for employers that translates into profits. I expect student loan debt service will soon become a standard in the industry,” he tells RIABiz. 

The federal SECURE 2.0 Act, a 2022 Biden administration law that expands on the original 2019 SECURE Act, makes the program possible. Among other things, the update expands automatic enrollment in retirement plans. 

National crisis

It's a winner, says Aaron Schumm, CEO of 401(k) recordkeeper Vestwell. 

“We are very active in the space and now incorporate our SLP [Student Loan PayDown] offering into every 401(k) plan we onboard, as long as the employer permits to enable it.”

Student debt is not only an issue for new grads but is a national crisis. The total outstanding student loan balance leaped to $1.72 trillion last year from $1.16 trillion in 2014, according to the Federal Reserve.

A whopping 45 million Americans or nearly one in four of the 159 million working Americans owe student debt, according to the St. Louis Federal Reserve Bank. 

Fidelity notes that “67% of recent college graduates burdened with student loan debt claim this debt is preventing them from participating in major life milestones such as saving for retirement, getting married or buying a home.” 

Under Fidelity's Student Debt Program, employers can make payments directly to an employee's student loan servicer, helping them pay down their loans faster.  Fidelity also offers a 401(k) student loan match, where an employer can match an employee's student loan payment with a contribution to their 401(k).

The program can be tailored to individual needs, with varying eligibility, payment frequency, and funding sources, according to the company. 

'Free money'

Fidelity projects that 401(k) savings will increase from $237,000 to $415,000 for participants who adopt the benefit, according to a release.

Fidelity, which serves 23,000 plan sponsors, including 41% of Fortune 500 companies and covers one in three U.S. 401(k) participants, got the jump, formally introducing the program in 2024. It has piloted the program internally since 2016.

For the participants, it's “free money,” analysts quip, because it taps into funds already allocated by employers for retirement plans to benefit debt-saddled younger staff who were previously cut out.

Other high-level 401(k) experts are equally effusive on the topic.

“This stands out as one of the best, most creative benefits,” says Annie Messer, member relations at Pension Resource Institute and Group Plan Systems.

A recent Vestwell report adds that “74% of employees with student loans would stay longer at a job offering student loan repayment.”

Fraud concerns

Yet for all the wonders of the “free money” match, scammers – alive to the possibilities of targeting those funds – have made plan sponsors reticent, according to a Bloomberg Law article.

“Companies have been slow to offer an enticing new perk—a 401(k) match for employees’ student loan payments,” Bloomberg reported. “Compliance and logistical concerns, even as the IRS cleared the way for employers to provide the benefit.”

The article added: “The STOP Act passed in 2020, meant to prevent scams by limiting access to certain student debt data, has also removed plan sponsors’ ability to access data from loan servicers. 

“It’s impeded processes that would help employers more efficiently prove that participants have made payments when offering a 401(k) match,” financial advisors and benefits attorneys told the publication. 

Plan sponsors are not overly inhibited, Fidelity counters.

“Our observation is that employers are eager to adopt these types of benefits,” its spokesman wrote by email. “Fidelity provides participants and employers with the support to understand which loans and payments qualify for the benefit. 

"Since SECURE 2.0’s passing, Fidelity has seen a sharp increase in demand for both the student debt retirement benefit and a direct payment benefit where employers directly help employees pay student loans.”

Fragmentation, risk

For Fidelity, larger employers are the early adopters. Fidelity is “currently working with clients with more than 250 participants.”

For Schwab, Candidly is needed to allow employers to determine that their matches are being done fairly and legally, says Lee McAdoo, managing director, Schwab Retirement Plan Services.

“Our clients who are evaluating student loan retirement matching can see value in Candidly’s independent reporting, which gives them the visibility, confidence, and support they need to offer this powerful benefit.”

Still, Schumm says that Schwab's reliance on a third party introduces potential “fragmentation and risk that can come with bolted-on third-party solutions.” 

It can also "create a lackluster experience with a ‘pop-out’ to another platform, if it's not fully embedded," says Schumm.

“In an ideal state, it's one solution from front to back, encapsulating the saver experience from a 401(k) solution to an employer student loan paydown (SLP), like we have built at Vestwell.”

Engineering solutions

Even so, Schumm credits Candidly for building a “nice solution.”

Candidly CEO Laurel Taylor declined to respond to a LinkedIn message and a receptionist reached by telephone at Candidly said there was no way for her to put RIABiz in touch with a media spokesperson by email or phone.

Vestwell's own program began with an acquisition to engender employer confidence.

"A couple of years ago, we acquired the market-leading solution, Gradifi.  We have since re-architected the solution entirely and fully embedded it into our fully proprietary, native Vestwell platform.  We also have clients who sign up to only use our SLP solution outside of the workplace savings program.