Committee Eyes 401(k) Debit Cards

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.