WSJ on 401(k) Debit Cards

So as not to be left behind in the debate over 401(k) debit card loans after the New York Times report I wrote about last week, the Wall Street Journal's Jonathan Burton reports [subscription required]: "Critics Detail the Ills Of 401(k) Debit Cards." In this report, Mr. Burton quotes several adverse reactions from the who's who in the retirement and financial planning world. Some choice comments:

"We absolutely hate it," said Jean Setzfand, director of financial security at AARP, the organization for people 50 and older. "A 401(k) loan is a last resort."

"A horrible idea," said Linda Lubitz Boone, president of investment advisory firm Lubitz Financial Group in Miami. "It's hard enough to save to begin with."

Even official watchdogs are on alert. The Financial Industry Regulatory Authority issued a stern warning about 401(k) debit cards, calling them "a tempting convenience that can have significant repercussions" on your retirement security.

The cards also have become Public Enemy No. 1 for some Washington lawmakers; Sens. Charles Schumer (D., N.Y.) and Herb Kohl (D., Wis.) blasted them this month as an apparent abuse of 401(k) plans and proposed legislation to outlaw them.

The heightened controversy about 401(k) debit cards comes with the times. There is an increasing concern that with things so tough, people living paycheck to paycheck will increasingly turn to retirement savings as a source of cash. Mortgaging your future, unless it is for an emergency or to enhance your education or career, is almost always a poor decision. You will have less money to support yourself after you retire or you will have to work more years before calling it quits.

The report does list some advantages of such loans over regular 401(k) loans:

For starters, the ReservePlus card is flexible; it can be used multiple times, for any purpose. As with a typical loan, employers set a borrowing limit based on how much you have saved for retirement. By law, the upper limit is generally $50,000 or 50% of your account balance, whichever is less. The approved amount is set aside in a money-market fund and earns tax-deferred interest until you use the card.

With every transaction, you have five years to pay back the money, and the interest rate -- now about 8% -- may be better than certain people can get elsewhere.
One advantage of a debit card is that if you are laid off or leave the company, there may be no pressure to reconcile the debt immediately. With a typical 401(k) loan, the outstanding amount must be repaid in full, usually within 90 days. Otherwise the loan amount is considered a taxable distribution.

I am sure of one thing: we have not heard the last word on this controversy yet.