Some members of Congress want to discourage workers from using 401(k) plan hardship withdrawals to pay everyday pre-retirement expenses.
Sen. Herbert Kohl, D-Wis., and Sen. Charles Schumer, D-N.Y., are introducing a bill that would ban 401(k) plan debit card programs and limit the number of hardship withdrawals that plan participants can take.
Plan sponsors that adopt debit card programs can let workers pay for small purchases by borrowing small amounts from 401(k) plan accounts.
At press time, the number of the bill was not yet available.
Kohl is chairman of the Senate Special Committee on Aging.
The committee today held a hearing to focus attention on regulators’ concerns about 401(k) debit card programs and other forces that might reduce American’s retirement savings.
Sen. Gordon Smith, R-Ore., the highest ranking Republican on the committee, argued that those forces are a threat partly because many American workers save far too little.
“The median 401(k) account balance in 2006 was about $60,000,” Gordon said at the hearing, according to a written version of his opening statement. “For most of us, our 401(k) will be our primary source of retirement savings – and $66,000 is certainly not enough money to retire on.”
Smith cited statistics from the Transamerica Center for Retirement Studies, Los Angeles, a unit of AEGON N.V., The Hague, Netherlands, indicating that the percentage of 401(k) plan participants with plan loans outstanding increased to 18% in 2007, from 11% in 2006.
The Financial Industry Regulatory Authority, Washington, recently wrote about the risks involved with use of 401(k) plan debit cards in an “Investor Alert” bulletin.
“Taking money out of your retirement savings, even for a short period of time, can have enormous repercussions for your retirement security,” John Gannon, a senior vice president at FINRA, warned at the hearing. “The results can be disastrous if you never put that money back.”
Bruce Bent, chairman of Reserve Management Corp., New York, a company with a 401(k) plan services unit, Reserve Solutions Inc. that offers the ReservePlus 401(k) plan debit card program, appeared at the hearing to talk about 401(k) debit card programs from a vendor’s point of view.
“The average loan balance for participants in plans utilizing ReservePlus is approximately 30% less than the average loan balance for all plan participants, i.e., $4,800 versus $7,000,” Bent testified. “Our default rate is 2.2%; we have been unable to determine the industry average.”
The ReservePlus program may be better for 401(k) plan participants than traditional plan loans, because the borrowers have the option of borrowing only what they need, rather than having to withdraw one large sum, Bent said.
Bent also talked about the mechanics of 401(k) debit card programs.
At Reserve, Bent said, the account opening fee averages $75 and the subsequent annual maintenance fee ranges from $25 to $50.
There is a $2 fee for cash advances but no fee for purchases by check or card, Bent said.
Plan participants must pay themselves interest, and they must pay Reserve Solutions a service fee equal to 2.9% to 3.25% of the loan balances actually used, Bent said.