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Tess Vigeland: A warning to investors this week: Think twice before borrowing from your retirement accounts, especially if you’re doing it with one of those new 401(k) debit cards.
The warning is courtesy of the Securities and Exchange Commission and the Labor Department who want you to have enough money to retire, and earlier this month, New York Senator Charles Schumer introduced a bill that actually bans 401(k) debit cards.
We asked Jeremy Hobson to look into the costs of making it so easy to borrow from your future.
Jeremy Hobson: If you Google “401(k) debit cards,” the first thing that pops up is a website titled “The 401k Debit Card: Probably One of the Worst Ideas Ever,” and that’s just what Christian Weller at the Center for American Progress thinks of it.
Christian Weller: The fear is that with a 401(k) debit card, more and more people will access their 401(k)s not just for emergencies, but for frivolous spending if you will, like a latte or an iPod or a plasma screen TV.
Now, taking money out of a retirement account early isn’t new. People often do it to pay for medical expenses or homes. But withdrawals require a lot of paperwork and in many cases you have to pay back your withdrawal with interest. Plus you can be hit with income taxes and a 10 percent penalty. Some in Congress worry a debit card makes retirement borrowing easier, so they want to outlaw the cards before they become too popular.
Bruce Bent heads The Reserve Fund, the largest provider of 401(k) debit cards with customers numbering in the thousands. He recently told Congress that allowing easier access to retirement savings actually encourages people to invest.
Bruce Bent: What we’re finding statistically is more people are willing to participate because they feel the access and the money is available to them.
In an email response to Marketplace’s questions, Bent’s company said it charges up to 3 percent interest on withdrawals. That’s on top of government penalties and Christian Weller says that’s the problem.
Christian Weller: Given that most people borrow from their 401(k) because they’ve gotten into economic troubles, I think layering that trouble on with more fees and costs is the wrong move.
Administrators of 401(k) plans are skeptical of debit cards too. Bob Weulfing is with the industry’s main trade group, the Spark Institute.
Bob Weulfing: I don’t know if it’s the dumbest idea in the world, but the loan process should be a very thoughtful process where you’re looking at all your alternatives and your last alternative is your 401(k) plan.
Still, Weulfing says Congress shouldn’t regulate the debit cards. He says people simply need to be educated about the consequences of dipping into retirement savings early.
In Washington, I’m Jeremy Hobson for Marketplace Money.
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