A workplace perk that can help your kids avoid debt

The last place many parents would look for ideas on how to save money for college is their workplace. After all, connecting with a 529 college savings plan is not exactly your typical job perk. Many young families don’t even use 529 plans for college savings.

About 45 percent of parents use an old-fashioned savings account to put aside money for college — making the low-risk, low-return accounts the most commonly used strategy, according to the 2018 “How America Saves for College” report by Sallie Mae, a provider and servicer of private student loans.Only 29 percent use the next most popular investment vehicle, tax-advantaged college 529 plans that offer a mix of stocks and bonds. Many times, families don’t even know the how to open a 529 plan, according to Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com. But more employers are weaving financial wellness into the company culture and, as a result, some employers now are encouraging their workers to use payroll deduction for 529 plans.

“As employers are moving into the realm of financial well being, this is the absolute next step,” said Brian Coleman, vice president for total rewards and human resource shared services for Dawn Foods, which has its headquarters in Jackson, Michigan. Dawn Foods is one of a small group of companies focusing on highlighting the benefits of college savings. Dawn Foods began offering a 529-related benefit to workers last year. Employees are able to contribute to the Michigan Education Savings Program via payroll deduction or direct deposit. The money can be used for a wide range of purposes, including a four-year college, community college and trade school.

Coleman said he views talking about college savings as the next logical step now that most employers are offering 401(k) plans for retirement savings. “They’re already talking to us about their 401(k) and how do they save for their future,” Coleman said. The company has held seminars to help employees better understand how a 529 plan works. The savings program is mentioned during open enrollment. “Now, they’re saving for their children,” Coleman said. Some start saving as little as $15 a paycheck. Others are saving as much as $100 to $200 a month.

Deadline approaching

Because Dawn Foods has distribution centers and plants across the country, it is careful to explain that the Michigan 529 plan, offered through payroll deduction, might not be the best for someone who lives in another state. The Michigan plan is one option and team members are encouraged to consider various state-sponsored 529 plans, which may have specific tax breaks for residents of those states.

If you live in Michigan, you’d need to contribute to the Michigan plans, which include the state’s prepaid tuition program called the Michigan Education Trust, to qualify for a tax break on the Michigan income tax return. Dec. 31 is the deadline to contribute to a 529 plan for any state tax deductions that might apply for 2018.

It is fairly easy to open a 529 plan online or through a financial adviser. You do need the date of birth of the child, the child’s Social Security number and address. And you can often set up electronic payments out of your bank account to set aside money automatically each month. But employers say promoting the 529 plan on the job greatly simplifies things for workers. “There’s no having to remember to sock something away,” said Mike Malloy, chief people officer for Quicken Loans.

Quicken Loans, which has offered payroll deduction for 529 plans for many years, said the 529 benefit has seen solid participation among its staff. Over the years, Malloy said, employees have found that they’ve been able to build up substantial college savings by steadily having money taken out of their paychecks. Sometimes, parents start saving a small dollar amount into the 529 plan and they later set aside more money through payroll deduction as children grow older. “When we talk about this benefit, we say, ‘Just start with something,'” Malloy said.

Even so, tapping into saving in a 529 plan isn’t for everyone. In a company that has about 2,500 employees that can participate, more than 150 employees of Dawn Foods are tapping into the 529 benefit. Financial wellness programs, in general, can be a tough sell at many companies. While employers increasingly are recognizing that financial stress can impact job performance, figuring out ways to get employees to participate in such programs can be challenging. “It has to fit the company and the culture,” said Tracie Sponenberg, senior vice president of human resources for The Granite Group in Concord, New Hampshire, a full-service wholesale distributor of plumbing, heating, cooling, water and propane supplies in New England.

Not everyone wants to save money for the future. “If they’re worried about the day to day and they’re living paycheck to paycheck, I think saving for college isn’t even on their radar,” said Sponenberg, who regularly speaks on trends in employee benefits.

Her company does not offer any benefits connected to college savings but it has tested a pilot program that involved joining forces with a nonprofit to provide financial education classes during lunch at the company headquarters. About 25 people from the company, which employs nearly 500 in six New England states, participated.

Legal services? Pet insurance?

She noted that the company also has had slim participation so far with a legal services benefit that would cost employees about $4 a week. Only about six people are participating so far. Only 11 percent of U.S. employers provide an opportunity for payroll deduction into a 529 college savings plan, according to the 2018 Society for Human Resource Management Employee Benefits Survey. About 1 percent go a step further and offer an employer contribution or match for money savings into a 529 plan.

It’s a quirky type of a newer benefit, much like pet insurance. About 11 percent of U.S. employers offer health insurance for pets, too, according to the benefits group. Money in 529 accounts won’t be taxed as it grows. Withdrawals are also exempt from federal income tax when used for qualified higher education expenses, and similarly, many states also exempt withdrawals.

What many might not realize is that 529 college savings plans — unlike prepaid tuition plans — can be used for a variety of expenses, including room and board, textbooks and qualified fees. The savings can be used toward expenses at private and public colleges, vocational schools or other post-secondary educational institutions eligible to participate in a student aid program administered by the U.S. Department of Education.

California’s ScholarShare 529 plan has been actively working to partner with companies that see the benefit of making it easier for their employees to save for college. California State Treasurer John Chiang said he promotes the savings plan to employers as an easy, no-cost way to help their employees meet a financial challenge. “We know that education costs are skyrocketing,” Chiang said. The theory is that students who have some savings in a 529 plan have a better chance at limiting how much money they end up borrowing for college. Ending up with a more manageable debt burden would enable college grads to be better prepared to save for a down payment for a home or a new car.

Julio Martinez, executive director of the ScholarShare Investment Board, said employees like the convenience of being able to set aside money after taxes through payroll deductions. ScholarShare 529 said 944 employers, including 32 of the largest employers in California, participate in some degree. One high-tech company offers a $1,000 match to those who contribute to the 529 plan at the workplace.

The average balance for savers in the California 529 plan — including those who set up accounts outside of work — was $28,120 as of the end of September. The average account balance for the Michigan Education Savings Program at the end of September was $21,609. About 1,281 Michigan employers offer a payroll deduction option for employees to make direct deposits into the prepaid tuition plan called the Michigan Education Trust and the college savings 529 plan, the Michigan Education Savings Program.

An employee can contribute a minimum of $15 per pay period. Typically, parents or grandparents like to choose a payroll deduction as an option because it’s convenient. “You won’t miss it if you don’t see it in your paycheck,” said Robin R. Lott, executive director for the Michigan Education Trust, the Michigan Education Savings Program and the MI 529 Advisor Plan.

Workers, of course, can change their minds and stop making contributions via their paychecks, if they’d like. “We think this is a growth area, given the fact that it is much easier to save using payroll deduction and not all employers offer it,” Lott said.