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A debit card that enables consumers to tap into their 401(k) retirement accounts is sparking debate in the retirement-planning industry.
Reserve Solutions, an affiliate of New York-based money-management firm The Reserve, offers the ReservePlus debit card. The company introduced the card in 2003, but a recent marketing push has generated fresh attention from the media and the retirement-planning industry.
While some experts say the concept has merit, retirement-plan advisers say borrowing from such nest eggs should be loans of last resort. Providing debit cards to access 401(k) accounts, they contend, may encourage more consumers to borrow off them.
"To make it that easy to access the money seems to defeat the purpose of saving for retirement in the first place," says Larry Shippee, president of The Benefits Consulting Group, a Chicago-based company that designs and administers 401(k) plans for employers.
Alicia Munnell, director of the Center of Retirement Research at Boston College, sees potential for misuse but says the plan could make saving for retirement more attractive.
"I feel like we need something to make the 401(k) your friend," Munnell says.
In a post earlier this year in his Retirement Plan Blog, Jerry Kalish, president of Chicago-based National Benefit Services Inc., noted the negatives of retirement loans. "Are 401(k) accounts piggy banks?" he asked.
Kalish would not recommend the card to small and medium-sized companies. "It's counter-productive," he told Cards&Payments sister publication Prepaid Trends. "I don't know anybody [who] thinks this is a good idea."
Reserve Solutions touts the card as an improvement for both employers and employees. David Young, Reserve Solutions director, declined to comment.
Using a ReservePlus debit card is not quite as easy as walking up to an ATM and withdrawing a couple of hundred dollars. In fact, consumers cannot join the program unless their employers make ReservePlus a component of their 401(k) plans.
Reserve Solutions says thousands of consumers have signed up for the card. However, with approximately 50 million Americans enrolled in 401(k) plans, according to the Profit Sharing/401(k) Council of America, the debit card has yet to make a strong impression, observers say.
"We've had no clients come to us and ask about it," Shippee says.
For consumers to use the card, their employers must approve their loan applications. As with other 401(k) loans, ReservePlus follows IRS rules that generally limit loans to 50% of the vested balance or a maximum of $50,000.
An approved loan is transferred to a ReservePlus account, where it remains in a dividend-earning money-market fund until cash is withdrawn. The loan begins only after cash is removed from the account. The Visa-branded card enables users to take out as much or as little as they deem necessary. On average, the company reports that ReservePlus participants borrow 65% of the amount available.
Cardholders pay back their loans in much the same way they pay credit card bills. Monthly statements from ReservePlus require a minimum payment but also enable consumers to pay back as much as they like.
Reserve Solutions contends that the card gives consumers enough flexibility and control over their loans to increase participation and contribution rates in 401(k) plans, especially among younger workers.
ReservePlus takes on the tasks of collecting payments and creating amortization schedules. Companies pay nothing to offer the card.
ReservePlus charges interest of about 2.9% above the prime rate on the loans. Other 401(k) lenders typically charge 1% to 2% above prime, the company says.
Using a payment card to access 401(k) accounts is not a new concept. In the 1980s, economist Franco Modigliani and Francis Vitagliano, a pension-industry executive, developed and patented a plan for a
credit card that enabled consumers to borrow from their retirement accounts. Bank One Corp., now owned by JPMorgan Chase & Co., tried the credit card in the 1990s but abandoned the program amid pressure from politicians who feared consumers would deplete their retirement savings.
With 20% to 30% of eligible workers not enrolled in 401(k) plans, the Center of Retirement Research's Munnell hopes someone finds a way to increase participation.
"Having liquidity may make it more appealing," she says of the cards. "People may put more money in if they know they have access to it."
But that liquidity also provides fuel for critics. Kalish worries that the ease of using a debit card could tempt consumers to spend their retirement savings on frivolous purchases.
"Loans on your retirement should be used strictly for financial hardship, not to buy a bass boat," Kalish says. CP
