Banc One Corp. plans to proceed with its launch in November of a credit card drawing on a customer's 401(k) funds despite an effort in Congress to outlaw the product.

A bill introduced recently by Rep. Charles Schumer, D-N.Y., would allow borrowing from retirement funds only for education, first-time home purchases, and urgent medical expenses, and during periods of economic hardship.

Rep. Schumer said his bill, sparked by Banc One's product, is designed to preserve employees' nest eggs.

"These funds are for retirement, not for consumption now," he said. "The last thing we need is to make this easy - with a credit card - for people to tap these funds before retirement."

Banc One lobbyist Annie Hall said the Columbus, Ohio-based banking company was a "little flabbergasted" by the proposed legislation.

"To pretend that employees can't handle this is nonsense," Ms. Hall said. "I do not believe that employers, employees, and banks need the government's help."

Borrowing from a 401(k) plan is not new, but Banc One's product will be the first to allow customers to access their account by credit card.

The product will allow employees to draw on retirement funds to pay for purchases made with their Visa cards. When an employee makes charges on a 401(k) credit card, the outstanding balance ceases to earn interest.

Banc One faces no credit risk - the customer is borrowing his own money - and will earn 3.9% on outstanding charges.

Employees will pay this fee plus the prime rate, currently 8.25%. However, this interest will be paid back into their 401(k) account.

Banc One has capped lifetime borrowing at $10,000 - or 40% of the employee's vested balance in the plan, should that figure be lower. Ms. Hall said with these limits it would be "virtually impossible" for employees to abuse the account.

There are an estimated 228,000 401(k) plans covering 22.3 million U.S. employees, with combined assets of about $675 billion.

The bank has received verbal assurances from the Internal Revenue Service that the product will not jeopardize a customer's ability to make tax-free contributions to a 401(k) plan, said John Russell, chief communications officer for Banc One.

"The only difference with this product (and other 401(k) loan programs) is the access," Mr. Russell said.

The IRS had no comment.

The bank's research shows employees are hesitant to participate in 401(k) plans because they fear they will lose access to their money. Ms. Hall said that of employees already in plans, 22% indicated they would increase contributions if the product were available and 50% of those not participating said they would be likely to start.

The product is designed as an alternative to home equity loans, offering younger, lower-income employees a moderately priced loan and the opportunity to establish a credit rating, Ms. Hall said.

Mr. Coplan writes for the Medill News Service.

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