401(k) debit draws red flags

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A new debit card that lets consumers use ATMs to withdraw money from their 401(k) plans is drawing a sharp reaction from financial planners.

The ReservePlus card is marketed by Reserve Solutions Inc., a New York financial firm that says it has 10,000 cardholders already.

The debit cards allow cardholders to take out loans from their employer-sponsored 401(k) retirement funds. Normally, restrictions on the funds discourage account holders from making withdrawals before they are 59½ years old.

Early withdrawals from 401(k) plans come with taxes and fees, which could deprive account holders of their nest eggs if they fail to replace the money promptly.

Financial planners warn consumers to be cautious about taking money out of retirement plans, especially as the nation's economic slowdown makes withdrawals more tempting.

"For every $10 you take out of the account, you only have $6 or $7 to spend, probably closer to $6, which means you're giving up a third of your money," said Stuart Ritter, certified financial planner for T. Rowe Price, a Baltimore asset-management company. "You're also giving up money to spend in retirement, so you are by definition lowering your lifestyle in retirement."

An economic slowdown and subprime mortgage crisis have made it more difficult for many people to gain access to credit. Financial hardships are driving more of them to tap their retirement funds, financial planners say.

"We have seen an increase in loans, and we have seen an increase in hardship withdrawals from 401(k)s," Mr. Ritter said. "Anecdotally, some of it seems to be related to people paying mortgages."

Reserve Solutions officials say the ReservePlus card creates no greater danger to retirement funds than any other type of loan from a 401(k) plan. In many cases, they say, the card reduces the risk of an employee depleting a retirement account.

The card "provides a loan line within the plan trust, making funds available as needs arise, eliminating excessive, premature borrowing," Reserve Solutions says on its Web site.