Making it easier to borrow against your 401k, heck as easy as a debit card just smacks of danger.
- Borrowing against your nest egg is becoming as easy as stopping at an ATM.
- A growing number of companies now offer employees the option of being issued a debit card that taps a 401(k) loan. The card, called ReservePlus, allows workers to withdraw funds from their 401(k)s.
- The immediate concern for consumers is that impulse spending desires could trump their long-term savings needs.
- Here's how it works: After a company adopts the program, employees can transfer their approved loan line into a ReservePlus account online. Later, they receive a debit card that they can use to take out as much or as little as they need of the loan amount -- on average taking out 35% less than they applied for, says David Young, director of Reserve Solutions at The Reserve, the company offering the cards.
- The loan begins only after the money is removed from the account. Instead of a payroll deduction, participants are billed directly, and then pay back the loan through the same mechanisms used to repay a credit card. Depending on the employer, some may also qualify for a revolving loan -- taking out and paying back money as they need it.
- The ReservePlus loan program is growing. The card was first offered in 2003, and Young says employees who have used the debit cards for loans now number in the thousands. "There's a lot of interest in what we're doing," says Young. (yeh I bet)
- Critics contend use of the cards risks depleting already skimpy retirement savings. "Big picture: it just takes us out of the context of a 401(k) loan being a loan of last resort," says Jean Setzfand AARP's Director of Financial Security. "Seeing what we see, [with retirement savings] not quite where we want to see it, we're just afraid that this is going to deplete it further."
- But easy access to money can be a double-edge sword. Employees pay for the convenience: The interest rate on ReservePlus loans is 2.9% higher than the prime rate, which is higher than traditional loans, and employees pay an initial set-up fee
- And critics argue that in some cases debit cards may encourage unnecessary borrowing. "By making it a debit card, you make it sound like the loan that you take on the 401(k) for everyday purchases," says AARP's Setzfand. "In our opinion, a 401(k) loan should only be taken as a loan of last resort, for a dire medical situation, or if there's no other way to get a home loan, not to go shopping."
Borrow from far to pay for near. Seems like this trend permeates from the top to the bottom in this country. Troubling.
