Where to Spend a 401(k) Debit Card Loan? Choices... Choices...

The New York Times (Ron Lieber) is reporting on the use of 401(k) Debit Cards, and efforts underway by Senators Chuck Schumer (D-NY), and Herb Kohl (D-WI) to ban their use. The one company that offers this feature is called Reserve Solutions. If such debit card loans were to be outlawed or curbed, I will speculate that the one trick pony business model of Reserve Solutions could cause it to fail as a company.

Ron Lieber at NYT interviewed both Senator Schumer and the founder and chairman of the parent company of Reserve Solutions, Bruce Bent. It makes for a very interesting reading - I highly recommend reading the whole thing. Some excerpts:

Q. How did you first get interested in creating legislation around debit card access to 401(k) loans?
SCHUMER Over 10 years ago, I read in the paper that Bank One was offering access via a card to 401(k) loans, and I thought, this is outrageous. America has to save. If people need to access their 401(k)s because of unusual circumstances, that’s one thing. But to encourage people to take money out with a card is encouraging all the wrong values. So I said then that I was going to put forth legislation, and the bank dropped it and I thought it was over.

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Q. Is this really that much different than simply going online and moving loan money from Fidelity or another 401(k) account administrator to your bank account?
SCHUMER It is totally different. A debit card allows people to spend on impulse. Not having one attached to a loan is sort of like having a waiting period for a gun.

Q. Are there particular types of workers to whom the debit card is especially appealing?
BENT It’s bringing in lower income and younger workers. They don’t come into the 401(k) plan in the first place because they’re unhappy with the concept of losing access to their money. Or invariably, the plans and the loans don’t work for them because they’re transient, working for one construction company at one time and another during another season.

Q. One plus of a debit card is that the issuer can see how people are actually using their money. So are they spending it on frivolous things?
BENT I can’t say. It’s proprietary, and it’s also personal information.

Q. Could an employer see that information?
BENT Well, if you outlaw the debit card, Big Brother’s ability to control expenditures is limited. They can’t control it then. With a debit card in place, Congress could dictate to us that Vendor 23, Victoria’s Secret, or Vendor 85, Joe’s Massage Parlor, don’t qualify. Or they could restrict entire categories of vendors where people could spend the money.