Wednesday, July 23, 2008
There have been many stories in recent weeks about the sharp increase in the number of workers having to tap their retirement savings in order to make ends meet or help deal with some other sort of emergency.
Now comes word in this story from MarketWatch that some financial institutions are making it easier than ever to "tap" this source of funds during what are very difficult times for many families.
It seems that some finance company is always helping people "tap" something and they always seem to get a healthy cut one way or another. Of course, "tapping" a 401k is a bit different than "tapping" home equity a few years back because it's real money as opposed to ephemeral home equity.
Debit cards are straightforward. You use them for purchases and money is deducted from your bank account. But when the debited account is your 401(k) retirement plan, critics angrily line up to take a swipe at that piece of plastic.That's rich - you get charged three percent to borrow your own money!
It's not hard to see why. The 401(k) debit card lets you borrow from retirement savings and pay yourself back with interest over time, much as you would with a typical 401(k) loan. Only the card makes it much easier to crack your retirement nest egg; all you do is shop, swipe and sign.
To the advisers, brokers and financial institutions pushing workers to save more for their futures and consider the 401(k) sacred, this debit card is not just objectionable, it's blasphemous.
"We absolutely hate it," says Jean Setzfand, director of financial security at AARP, the organization for people 50 and older. "A 401(k) loan is a last resort."
Reserve Solutions, a unit of New York-based money manager The Reserve, claims on its Web site that its ReservePlus debit card "encourages 'smart borrowing' practices."
Bruce Bent, The Reserve's chairman, says the 401(k) industry and lawmakers have a "gross misunderstanding" of the product and that access to retirement funds can spur employees -- especially lower-income and younger workers -- to save for retirement.
In addition to the finance charges, expect set-up, maintenance and cash-advance fees. Repayments are made with after-tax dollars that will be taxed again when you start drawing on your account, and the interest isn't tax-deductible.
Look closely at that interest rate too. It's based on the prime rate of 5% -- money that returns to your 401(k) account when you repay it. But the other 3% or so goes directly to Reserve Solutions.
Given the recent performance of both the stock market and the economy, withdrawals are now probably at all time highs.