Just Put It on My 401(k) Debit Card

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. "It's a unique and logical solution to an archaic process."

The debit cards are "not for everybody," Young says. But adds, though, that the cards give people a sense of confidence and control, which in turn encourages otherwise reluctant people to participate in retirement programs, knowing that their savings won't be locked up for decades.

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."

The card clearly has benefits for human-resource departments. The 401(k) debit-card program means that it no longer bears the administrative burden of creating amortizations schedules and collecting loan payments. And the program is free for them to adopt: employees pay for the programs administration through an initial sign up fee and interest on their loans.

The plan has major advantages for employees as well.

Generally, with traditional 401(k) loans, employees must pay back their loan within 60 days of leaving a job or be subject to hefty tax and early withdrawal penalties. But with ReservePlus, an employee is able to continue paying the loan off of its initial course -- typically five years -- regardless of employment. Young estimates that traditional loan programs' lack of portability causes $50 billion a year to be leaked out of retirement programs. And employees have an easier time paying back loans early: rather than a set payroll deduction, employees can pay back as much as they choose each month -- on average paying 14% more than the minimum payment, says Young.