401(k) Credit and Debit Cards
I’m disgusted. Ok, perhaps that’s a bit harsh. Irritated really isn’t, though.
We got an email at work today saying that our company may participate in this new program that allows debit and credit cards to be issued for 401(k)s – something called ReservePlus. Essentially, if our company signs up for this program, there’s a limit set for how much you want to spend from the account and this becomes the “limit” of the card.
What this boils down to is this card gives employees a different way to access a 401(k) loan. Each time the card is used, it’s a loan against the 401(k). The employee would receive a statement every month that lists what was borrowed and what the monthly payment will be. They then have 60 months at a rate of 2.9% over prime to pay it back.
The email we got today was sort of a vote to see what we thought before they bought into the program. They wanted our feedback. Here are my thoughts on the situation. Most of this was more or less in my email to HR.
I think this is a bad idea. It gives people too much access to a fund that is meant to be for retirement. It cripples people from finding other creative solutions to their debt problems. A 401(k) should be a last resort and not something that you can easily pull a credit or debt card from your wallet to make purchases with.
This whole program in general is terrible. For financial institution employees, the temptation may be bearable – though I still don’t think it’s a good idea and responsible financial institutions should know better than to offer such a product, in my opinion. However, this program isn’t restricted to just my company. No, no. This product is being rolled out nationwide.
Here’s a thought. Let’s let a nation of people in debt up to their eyeballs, who have maxed out their credit cards, their home equities, and have probably lost their home to foreclosure have easy access to their 401(k)s. Yes, that makes sense.
For a government so “concerned” about our credit and debt crisis, I can’t believe that such a thing is being allowed. It truly blows my mind. How can this possibly lead to being a good thing? People are struggling. While many of them are already borrowing against their 40(k)s, I think the process overall makes them consider their options. But, how easy would it be to simply pull out a card and hand it to the grocery clerk?
Another concern for me is the repayment terms. According to this company, the repayment is a little more flexible than normal standards in terms of leaving a company where you have an outstanding loan. Normally, when you have a 401(k) loan and you leave your company, you have 90 days to pay it back or it counts as an early withdraw, you’re penalized for it, and the IRS credits it as income for that year. However, with ReservePlus you still have the 60 months to repay. Yes, that gives you flexibility when money is a little tight, but do we really want people living off their 401(k)s in between jobs?
The marketing on this product is amazing, though. They claim that there’s a market for it and those who use the product don’t abuse it. Ok, well it’s only been around for a short period of time, so I’d venture a guess that the ‘users’ in question are employees of this shark’s company.
But, perhaps I’m being a bit unfair. A responsible person may find this particular product very beneficial and avoid hurting themselves. However, I think if companies are going to embrace this product, there needs to be a few rules. Number one on my list is if they have maxed credit cards, behind on their loans, and have a debt to income higher than 75%, they do not get a card to tap their 401(k). If they want a loan, they can go the normal channels, get a check, and work with what they’ve got on hand to reduce their debt.
At the end of the day, I’m totally against this product. It’s too easy to get into trouble with this and I think consumers, in general, have enough trouble. My email response to HR wasn’t quite as lengthy as this post, but I conveyed much the same message. I’m just a lowly person on the totem pole, so my one vote may not mean much especially if others are on board for the product. However, I hope that my fellow bankers are just as against this as I am. I do NOT want to have to counsel coworkers on top of clients – that’s just uncomfortable.
Ok, let’s hear your thoughts. Do you think this product is a good idea? Why? If you agree with me, what are your reasons?
I’ve heard of this before and I agree with you, it’s terrible idea. UG.
I think there is the potential for people to abuse it, but I think you’re being over the top in your condemnation for it. What you’re saying boils down to this: “I don’t trust people to manage their own money, so I vote that we make it as difficult as possible for to take actions that could potentially screw up their money, even if it infringes on the ability of the responsible to fully utilize what they’ve earned.”
It’s *my* money, dag-nabbit. If I want to pull money out of my retirement account, that’s my business, and not yours or anyone else’s. If I do the wrong thing and screw it up, I cry. If I want to do the right thing, but people who think they know more about my needs and abilities want to keep me from getting to my own assets, then we’re going to be having words shortly. In my opinion, anything that puts more control in the hands of the rightful holders of the asset is a good thing.
Some people are going to be idiots and fritter away their retirement accounts. I’m not going to be one of those idiots, but it might be a better alternative than a 7% loan if I’m going through unemployment, my savings (6 months) have run out, and I know that I’m committed to balancing it back out when I get back on my feet. Why is someone trying to tell me that my retirement account is not something I should have control over?
If it was proposed that savings be mandatory and controlled for every individual by a board of smart folks, would you be for it? I mean, if those shmucks can’t be responsible, we’ll MAKE them be responsible, because the experts know what’s best for each of us, right? Right?
I’m not suggesting that you shouldn’t have access to your money at all. I think you’ve totally misunderstood my post. What I don’t approve of is giving people credit cards to access it anytime they feel like it. Retirement money is meant simply for that, retirement. It’s not there so that you can skip on over to the local electronic store and buy that big screen TV you’ve been eying. If, as a last resort, you need to dip into your 401(k) to cover some debt, then fine. You have every right to do so as that is your money. However, giving people credit cards to access the account is basically giving them access to the entire account and as a nation in debt and tapped on home equities - because of credit cards - it doesn’t seem like the smartest decision to allow those same people to have credit card access to their 401(k).
Not only that, but let’s consider the alternative where companies say it’s a good idea to give it to their employees and everyone gets a card. What happens in a couple of years when people have depleted their accounts? Your scenario presupposes that people will take responsibility for their actions, when in reality most people don’t. Don’t believe me? Take a look at the current situation. Yes, the lenders are just as responsible as the consumers for giving out the loans, but consumers do their fair share of the blame game when they should have known that getting the loan would have been more than they could handle. It’s just a fact of life, it’s easier to blame someone else. Now, before you get all worked up over that statement, I’m not suggesting that this applies to everyone. Even still, I don’t think credit cards attached to a 401(k) is a good idea, even for a responsible person. You need cash from your 401(k), then do it the old-fashioned way.
And just to clarify, by using the credit card, you agree to the terms and conditions which is to say, you agree to a 401(k) loan. It’s prime plus 2.9% on the repayment - so you still make out better with the 7% loan you mentioned.
Let me see if I understand this right. I basically get a credit card by another company, and they loan me up to whats in my 401k or whatever I choose. Then I have to pay it back to that other company at a 2.9% interest rate? Or is it like it deducts the money out of my 401k and I am paying myself back with interest? If it is the 1st option, paying someone else back at interest, is there anyways to borrow out of a 401k and pay myself back with interest?
Hi Justin,
My understanding of the program was that the interest is paid back to the company. I’ll look into it more to be sure, because it could go directly back to your employer like a regular 401(k) loan does. However, either way, that interest doesn’t go back to you. To my knowledge there is no such loan process that allows you to borrow from your 401(k) and pay interest to yourself. But, if anyone else knows of one, please share!
who are you to tell me what I can or cannot do with MY money! Get on a different soap box, one that is yours personally!
@ jacqui
I wasn’t on any soapbox, just expressing my opinion on the matter as it did relate to me. My company was questioning whether we wanted it or not, I say not. If you don’t agree, that’s fine. However, as my job makes me an expert in these sorts of things, I don’t have a problem sharing my opinion as it relates to others. I’m not telling you what you can or can’t do, nor do I presume that my words should be taken as such. Your comment, though, suggests you didn’t read the post in it’s entirety. But, if you’d rather blow all of your retirement money now and work until you’re into your 60s and 70s, who am I to dissuade you?
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