The 401k Debit Card: Losing the Future

In what has to be the most financially irresponsible move the financial service industry and the U.S. Government have made—ever—you can now get a debit card that gives you access to your 401k retirement account. Consider this: Over the last thirty years, there has been more effort made to part you from your money, to put you and keep you in debt than at any time in American history. The scary part is that these efforts have worked so well, changing our culture from a savings orientation to a debt orientation. What was the big selling point that pushed this change? Convenience. With credit cards, you can get a loan whenever you need one. It’s so convenient you don’t even have to pay it all off when the bill comes in. Debit cards draw from your checking and savings accounts. All you have to do is keep track of your spending and maintain your account balances. How convenient is that?

The traditional 401k retirement scheme, while rather cumbersome and inconvenient, has always allowed for loans. The problem, as some saw it, was that repayment was through automatic payroll deductions and that if you left your employer, the law stipulated that you had 60 days to repay the loan in full. If you failed to do that, you would be subjected to heavy penalties and taxes. Under rules like these, borrowing against your 401k was a “last resort” kind of thing, something contemplated when all other avenues have been exhausted. The idea behind all this was a sound one: Don’t touch your retirement unless you absolutely have no other choice. 

So here, in the 21st century, where instant gratification is just not fast enough, the folks at The Reserve came up with an idea: The ReservePlus program and its 401k debit card. Once the program is adopted by a client company, employees will have an approved line of credit in a ReservePlus account tied to the employee’s 401k. They then receive a debit card that will allow them access to as much or as little of that line of credit as they want.  This loan is then paid back in the same way as a credit card. In an article appearing on TheStreet.com, David Young, director of Reserve Solutions at The Reserve, described the program as a “unique and logical solution to an archaic process.”

Would that be the archaic process of saving for retirement, Mr. Young? Perhaps it is the archaic process of sticking to our commitments? After all, retirement savings are supposed to be a long term proposition. That is why you can retire on them. It takes years of interest and reinvestment and growth to provide you with the funds you will need when you are in the sear and yellow. One popular purveyor of retirement investment sums it up nicely when they admonish you not to outlive your money. How are you supposed to accomplish that when you can use that money to buy groceries or new furniture or movie tickets? True, most people do repay the loans over a period of years, but while those loans are out, the money that should be an interest-generating asset is now an interest-generating debt. Money goes out, not in. In other words, you lose money every time you pull out that 401k debit card

In the United States, a country where, by all measurable standards, the rate of retirement savings is dismal, how can this possibly improve matters? The U.S. Government Accountability Office said that loan features do increase participation in retirement plans, but that has been the case for a long time. The rise of the 401k debit card doesn’t change that. However, that same report also indicated that having access to retirement savings could lower the actual rate of savings and there this dubious convenience certainly does come into play.

In other words, the 401k debit card does nothing in and of itself to increase participation in retirement plans, which is a far greater problem than anything that could qualify as Mr. Young’s so-called “archaic process.” It does, however, exacerbate the problem by reducing the amount of money that people do save. ReservePlus is nothing but a cynical attempt to tap into a pool of funds that had previously been fairly safe, your retirement. If you are a small businessman considering this for you employees, consider the ramifications of subscribing to this. If you are an employee, don’t be tempted. What good will that new TV, or weekend in Las Vegas, be when you are 80?