Borrowing against your nest egg is becoming as easy as stopping at an
ATM.
But you might have to sleep in the street when you retire
Although the bankers could care less about that
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.
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, according to a federal
government study into the country's low retirement savings rate,
though there is no data, loan defaults are "expected to be much lower
where repayments are made by payroll withholding." ReservePlus
currently offers no payroll withholding option, but the company says
it will introduce one shortly.
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."
Indeed, a November study by the U.S. Government Accountability Office
into the country's low retirement savings rate found that
preretirement access to funds may lead to lower retirement savings,
though it also cited evidence that a loan feature increases retirement
plan participation.
Using ReservePlus loans as a mechanism to increase retirement savings
participation just makes sense for some demographics, says Young. The
participation rate for the GenY age group is low because people "don't
want to tie their money up in a program they can never access during
their working years. People want to be in control of their retirement
plan savings, and when they feel in control, they're more likely to
participate or contribute at higher levels." And it makes stable
lending possible for seasonal employees and industries with high
employee turnover.
Fred Barstein, president and chief executive of 401(K) Exchange,
adopted ReservePlus for his employees almost a year ago. He says the
program hasn't changed the frequency with which his workers take out
loans against their retirement, or the size of their loans, but it has
created a stable loan program for his largely transitory work force --
about 75 of his 110 employees work in the call center. As the head of
a company, who helps plan sponsors and advisers find the right plan,
he says, it was particularly important for him to provide his
employees with a "state of the art plan."
Still, Barry Kublin, president of BPA-Harbridge, an employee-benefits
company with 15% of its outstanding 401(k) loan portfolio comprised of
ReservePlus loans, says there is some resistance to the product's
adoption. Investment advisers, he says, worry about money leaving the
plans and employers worry about employees squandering their savings.
"It's a young technology, and clearly requires education to address
misconceptions," says Kublin. "Do we deny the overwhelming percentage
of 401(k) participants a portable convenient loan product that is
responsive to their needs because of the irresponsible few?"
--
Davey Crockett
-
Driving a Stake through the
Heart of the Politically Correct