Jul. 24--Only one financial services company offers the product, which 18,000 people in the nation possess, but debit cards tied to 401(k) plans have touched so many nerves that some in Congress want them outlawed.
Supporters said the 401(k) debit card gives workers quick access to their money in emergencies, but critics fear the program opens the way for a new type of nest egg spending -- borrowing for daily expenses instead of major costs, such as home purchases.
"We're concerned that what it would be used for is current consumption: buying pizza and lattes," said John Gannon, senior vice president for investor education at the Financial Industry Regulatory Authority based in Washington, D.C. A nongovernmental regulator of securities firms, it issued an alert against the cards in May. "If you look at how plastic is used, it increases current consumption."
The program is offered by Reserve Solutions, a Manhattan-based loan processing subsidiary of The Reserve, which manages $86 billion in financial assets and was founded by its chairman, Bruce Bent, who ran against Nassau County Executive Thomas Suozzi in 2001.
The company has been marketing the card to young, low-income and transient workers, groups less likely to join retirement plans.
"We encourage more people to get into the plan because they are comfortable with the fact that they can get access to their money if they need it," Bent said.
The loan, called ReservePlus, works like a combination credit card and 401(k) plan. In a key departure from traditional 401(k) loans, the borrowed amount stays in the plan, in a separate money market account, earning dividends but lower returns than stocks. If withdrawals are made, the user is charged the prime interest rate, which goes back into the 401(k), and an additional servicing rate of 2.9 percent to 3.25 percent rate for Reserve Solutions. There's also a fee for opening the account, an annual maintenance charge and no grace period for payments. Just as in traditional 401(k) borrowing, those who default will have their loan amounts taxed as income and face a 10 percent penalty for early withdrawal if they're under the age of 59 1/2.
Many of the employers offering the debit card option are small to midsize businesses from the Southeast, Bent said. So far, about 20 percent of ReservePlus enrollees have used the card, the financier said, and 98 percent have been paying back the loans. The average borrowed is $4,800, about 35 percent less than the average for traditional 401(k) loans, he said.
Utica-based Benefit Plans Administrators Harbridge, which oversees about 2,000 retirement plans, considers ReservePlus as the latest evolution in 401(k) plans. With debit cards, said company president Barry Kublin, safeguards can be placed on spending.
But Sen. Charles Schumer (D-N.Y.) this month introduced a bill to bar 401(k) debit cards and held a congressional hearing last week with several groups opposed to the card, including AARP.
"There are times when you have to take money out of your 401(k), but it ought not to be done on impulse," Schumer said.
Bent said there's no proof that workers have been using bad judgment on spending their 401(k) debit loans: "People do act in their own best interests."
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