ATM Cards for 401(k)s Stir Controversy

Financial Experts: Plan 'Makes It Way Too Easy' to Get Cash From Savings

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NEW YORK ( -- At a time when mortgage defaults are at an all-time high, a New York company is marketing a debit card that allows users to withdraw money from their company 401(k) savings -- a plan one financial expert called "a disaster waiting to happen."

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Reserve Solutions, a unit of Reserve Management Corp., is offering a plan called ReservePlus, where employees of a company that does its cash-management business with Reserve can have portions of their 401(k) balances transferred into loan accounts. The employee is then given a debit card and is able to withdraw cash from that account at an ATM. The loan is paid back monthly, with interest.

The benefit to employers is that much of the responsibility of administering the 401(k) plans shifts to the debit-card provider, and employees get access to cash in a tough economy.

Questioning the use of debit cards
But is that really a benefit? Although workers have been borrowing against their 401(k) plans for years, financial analysts question the marketing and wisdom of a debit card to use against their savings.

"It's a horrible idea," said Tracy Coenan, a forensic accountant who performs fraud examinations as president of her Milwaukee company, Sequence. "I'm not a big fan of loans from 401(k) plans anyway, but this makes it way too easy to pull money out of there without thinking it all the way through."

Ms. Coenan said the plans are meant for retirement, and called the debit cards "a disaster waiting to happen" that can have implications on taxes if an employee can't pay back the loan. As it stands, employees pay a setup fee to open the ReservePlus debit-card account and pay an interest rate 2.9% higher than the prime rate.

Michael Scarborough, president-CEO of Washington financial firm Scarborough Group, told Fox 5 in Washington the plan encourages people to "turn right around and go out to dinner, buy drinks, buy clothes, whatever -- and that's not what these accounts are for. When you give people loaded guns, they tend to shoot themselves."

David Young, director of Reserve Solutions, disagreed. The company estimates that between 5,000 and 10,000 workers have subscribed to the 401(k) debit-card plan so far and have actually paid back an average of 14% more than the minimum monthly payment.

'More convenient'
"All ReservePlus is doing is making the process to acquire [money] more convenient for both plan sponsor and participant," Mr. Young said.

So far, the advertising of the 401(k) debit card is being done through direct marketing via companies that use Reserve to implement their 401(k) plans. Employees are made aware of the option to open the account from which to draw funds, and Mr. Young said it has spread virally from there.

Ms. Coenan said if people need extra cash, they should temporarily stop contributions to a 401(k) plan and instead use the money that would have gone into that savings. "Withdrawing from your 401(k) should be the absolute last resort" she said.
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