The 401(k) Debit Card

Posted by: Sophie H. | Jan 15,2008


How’s this for a bad idea?  Normally, the 401(k) has been good for one very good reason: you couldn’t withdraw money from it without paying a price.  It was a sort of locked box protecting people against their lack of willpower.  That’s really the main issue behind people’s money trouble: a lack of willpower.  With a 401(k), the account was secure because people wouldn’t withdraw on that account until the necessary time: retirement.  

Now there is a new system for the 401(k) being adopted by many businesses in which employees can be issued a debit card tied directly to the 401(k) plan.  The difference between this type of 401(k) – called a ReservePlus program – is that it works like a loan.  You set the terms of the original loan and then you pay back the money you withdraw like a standard credit card.  

Let me take back that “bad idea” comment and play devil’s advocate.  What if you were to use a 401(k) for something besides retirement?  Instead, say, you used it for putting a down payment on a home.  You apply for this type of account and then withdraw the money when you need to make a major purchase.  The problem is that this system doesn’t work like a standard 401(k).  The money is determined upfront and then the employee needs to pay back the loan with interest.  Really, this is like turning the employer into a banking institution.  

I could see other some benefits for this system, however.  One major reason that some younger people don’t invest in a 401(k) is because they can’t afford to have those savings locked away for many decades down the line.  Though it does take willpower not to raid this fund, it could also inspire some younger people to invest ina 401(k) who might not otherwise.  Just the idea that they could withdraw money from the fund whenever necessary may be enough to invest in the fund in the first place.  This may make 401(k) use and retirement planning more widespread.  

More often, though, I could see people merely using the account as a credit line.  The 401(k) will cease being seen as a retirement vehicle, and more of a way to afford necessities, or even frivolous buys, much like a credit card.  In all, the system has plusses and minuses, but my initial reaction is to think that this is not the best method to save for retirement long term.  

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