401(k) Debit Cards Sound Good, but...


ReservePlus allows people to withdraw funds from their 401(k)s with a kind of debit card. That might sound pretty good, but many experts say it makes borrowing too easy and can put Americans' nest eggs at risk.
ReservePlus might appeal to people like Stuart Burgher, who bought a house in Ames, Iowa, for $89,000 in 1997, putting about half down with help from money that his wife had inherited from her father. At first, he managed to make the $400 payments on his mortgage every month -- but refinancing and an adjustable rate soon pushed those up to stifling quantities.

Strapped with his loan bills and determined to keep his home, Burgher drained around $5,000 from his 401(k) a couple of years ago. That didn't get him far.

His mortgage payment has soared since to above $900 month and again he's worried about losing his house in the weeks ahead. Already working 60 hours a week as a mechanic to pay all his bills, the 59-year-old doesn't know how to keep making ends meet.

"I'm not able to work all these hours," Burgher says. The 401(k) "bailed me out for a while, but it was a Band-Aid."

If Burgher participated in ReservePlus, he could tap into some of the $20,000 or so remaining in his 401(k). He could sign some paperwork and, taking the terms and conditions of his plan into account, decide how much he wanted to use of the money available to him for borrowing. Within weeks, he'd get a ReservePlus Loan card in the mail for withdrawing cash from an ATM. He could then take out as much or as little of the loan whenever he needs it, for as long as it lasts.

Once a ReservePlus customer decides how much money to set aside for future loans against their 401(k)s, the amount is held within the plan in a money market fund until it's taken out. The program, which is provided by Reserve Solutions, has signed up thousands of people since it started in 2003.

Such convenience doesn't come free.

If the already cash-strapped Burgher took out a 401(k) loan the traditional way, he would have to pay back the interest to his own plan, effectively to himself. If he used ReservePlus, on the other hand, he'd pay an additional 2.9% in exchange for those debit card-like services. There would be other fees tacked into the program, such as $2 for each cash advance he makes. The initial setup and annual maintenance fees would depend on Burgher's company and 401(k) plan rules.

Fred Barstein, chief executive officer of 401k Exchange, is a proponent of the program. His company, which connects plan sponsors with advisers, has made ReservePlus available to its employees during the past year or so.

"It was available and didn't cost us and we thought it was interesting," Barstein says. He pointed out that in a traditional 401(k) loan, you have to take out a lump sum, whereas the ReservePlus program allows you to take your loan out in small pieces, which might prevent people from spending all that they can as a result.

"There's a feeling in the industry that this is a bad thing. I don't necessarily agree," Barstein says.

However, many experts think that a convenient way to obtain 401(k) loans is less than desirable.

ReservePlus is "an old idea, but it's the first time it's actually been available because somebody decided to take the risk of adverse publicity and see if they can make money," says Dallas Salisbury, president of the Employee Benefit Research Institute in Washington.

"The 401(k) is designed to be used for retirement," says Arthur Ousley, director of housing and education at the Des Moines office for the nonprofit Consumer Credit Counseling Service. "It's defeating the purpose if people encourage you to dig into it."

"I guess if somebody needed $200 they could get it this way, but for gosh sakes, what a dumb idea to nickel and dime your 401(k)," says Dr. Greg Kasten, the chief executive officer of Unified Trust Company in Lexington, Kentucky, which advises high net worth individuals.

Industry experts say there are better ways than ReservePlus to dig yourself out of financial straits.

Sonya Hotchkiss, a counselor with the Consumer Credit Counseling Service, advised Burgher to start with what she calls the "envelope system." You get one envelope for each type of expense you have: clothes, food, rent, or whatever it might be. You put the receipts for everything you spend into each envelope for a month, and then you figure out which of those costs you could cut. During the next month, if you decided that you would now spend $100 on clothes instead of $500, you stop buying clothes once you hit your $100 mark, and for the rest of that month you don't take any of the money that you'd allotted for your food envelope to get yourself a new dress.

"The envelope system is good," Hotchkiss says. "I tried it myself. It seems silly, but it does work."

Burgher says he's going to give the envelope idea a go.


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