A few weeks ago, I wrote a column about the wisdom of taking loans against your 401(k) account. The story mentioned a company called Reserve Solutions that allows customers to access their loan via a debit card at an A.T.M. or any merchant that accepts Visa.
There's a lot about Reserve Solutions system that is advantageous. Rather than getting their 401(k) loans in a lump sum, which is how the loans often work, borrowers in the Reserve Solutions system can draw down money as they need it. That helps reduce the amount of interest. And if they leave their employer, they don't have to pay the loans back right away, unlike the usual 401(k) loans.
But it's the debit card access to loan funds that has drawn most of the attention. On Wednesday, Senators Charles E. Schumer, Democrat of New York, and Herb Kohl, Democrat of Wisconsin, introduced legislation that would outlaw the use of credit or debit cards in association with 401(k)'s or other similar retirement plans.
Below are transcripts of conversations I had about the issues surrounding the card with both Senator Schumer and Bruce R. Bent, the founder and chairman of Reserve Solutions's parent company, The Reserve. First, Senator Schumer.
Q. How did you first get interested in creating legislation around debit card access to 401(k) loans?
SCHUMER Over 10 years ago, I read in the paper that Bank One was offering access via a card to 401(k) loans, and I thought, this is outrageous. America has to save. If people need to access their 401(k)s because of unusual circumstances, that's one thing. But to encourage people to take money out with a card is encouraging all the wrong values. So I said then that I was going to put forth legislation, and the bank dropped it and I thought it was over.
Q. Were you surprised to hear that a company was trying a similar approach again?
SCHUMER I thought we had put a dagger through its heart, and now we will try again.
Q. Isn't it possible that there is some logical reason for offering a debit card, that it's the most efficient and convenient way for some types of workers to access their funds?
SCHUMER No, I just think a lot of people do a lot of impulse buying and borrowing, and this will encourage that. The bottom line is the fact that the pressure in society today is for people to spend all their money and go into debt, and the 401(k) is one of the few barriers we have.
Q. Is this really that much different than simply going online and moving loan money from Fidelity or another 401(k) account administrator to your bank account?
SCHUMER It is totally different. A debit card allows people to spend on impulse. Not having one attached to a loan is sort of like having a waiting period for a gun.
Q. You're the only company offering a debit card that allows access to a 401(k) loan. Do you think it's unusual that a couple of senators would try to create a law that targets a single company's product?
BENT We have a problem with retirement savings in this country, and I agree with that. So the senators feel that something has to be done, and it really doesn't matter as long as they can show some activity. So they say, ''Throw him over the boat.'' Shouldn't we be figuring out whether he's the guy with the keys to the life jacket closet before we throw him overboard?
But all of this also says that I've failed to do enough education as to what the debit cards are.
Q. So why are the debit cards necessary to your system? Couldn't people go online to transfer money from their loan to their checking account and access the money that way?
BENT It's not necessary, but psychologically, it's an advantage. The card is here if I need it, if things hit the fan, if Katrina comes and I can't go to a Web site but I can go to an A.T.M. and get my money. When you're trying to sell something, you try to get attention, and this is a way of getting attention. We have the negative and the positive.
Q. Are there particular types of workers to whom the debit card is especially appealing?
BENT It's bringing in lower income and younger workers. They don't come into the 401(k) plan in the first place because they're unhappy with the concept of losing access to their money. Or invariably, the plans and the loans don't work for them because they're transient, working for one construction company at one time and another during another season.
We have two unions that have come in, and the reaction of the unions and their members and the construction companies is they love this thing. We're getting a great response.
Q. One plus of a debit card is that the issuer can see how people are actually using their money. So are they spending it on frivolous things?
BENT I can't say. It's proprietary, and it's also personal information.
Q. Could an employer see that information?
BENT Well, if you outlaw the debit card, Big Brother's ability to control expenditures is limited. They can't control it then. With a debit card in place, Congress could dictate to us that Vendor 23, Victoria's Secret, or Vendor 85, Joe's Massage Parlor, don't qualify. Or they could restrict entire categories of vendors where people could spend the money.
July 19, 2008, Saturday The New York Times on the WebColumn: 0 Desk: Business/Financial Desk Length: 1033 words