Most companies encourage employees to put money into their 401(k) plans. Now employees can get that money out again — with a debit card. A company called Reserve Solutions (an affiliate of asset-management firm The Reserve) has been marketing ReservePlus, a debit-card system that allows employees to borrow from their 401(k)s via automated teller machines. Companies must first approve the amount an employee can borrow and then transfer the cash into a money-market account, which the employee can access just by swiping a card.
Reserve Solutions maintains that giving employees easy access to their own funds encourages their participation in savings plans. Many employees who sign up don't end up using the full amount initially requested, and they can pay back their loans over time if they lose their jobs or change jobs (a typical 401[k] loan would require immediate repayment to avoid triggering taxes and penalties).
But both the Financial Industry Regulatory Authority and the Securities and Exchange Commission have issued consumer alerts about such debit cards recently, pointing out drawbacks, like interest that begins accruing as soon as the employee withdraws money, and fees paid to ReservePlus. Not to mention that the money set aside for borrowing could earn far less in a money-market than it would in another investment vehicle.
Sending the message that retirement funds are easy to access is the biggest danger of all, says David Dreyer, finance chief at AMN Healthcare Services, a medical staffing firm based in San Diego. The cards seem "completely contrary to what we're trying to promote," he says.
"I would highly discourage any company from implementing a plan like this," says Sue Walton, senior investment consultant at Watson Wyatt Worldwide. While some lawmakers vowed to ban the practice, easing restrictions on 401(k) funds has emerged as a possible response to the economic crisis.