- The Washington Times - Monday, February 18, 2008

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.

Traditional loans from 401(k) accounts “encourage excessive, premature borrowing” by giving borrowers a lump sum based on their estimated needs, the company says.

Employees always have been able to take out loans against their 401(k) accounts, but not with ATM cards. The ReservePlus program allows employees to transfer approved loans into online accounts that continue to earn interest. Employees then can withdraw cash from the account at ATMs, up to the maximum approved by their employers. They also can use their debit cards to buy goods and services.

Any marketing method that makes it easier to withdraw money from retirement accounts is dangerous, investment fund managers say.

“The need for individuals to save for retirement has grown over the year due to the uncertainty of Social Security, the shift away from pension plans and the increasing cost of health care,” said Jennifer Engle, spokeswoman for Fidelity Investments, a Boston money manager. “Retirement vehicles provide tax-advantaged savings combined with the power of compounding, so we recommend that people investigate other funding options before taking a withdrawal from a 401(k).”

Regardless of the wisdom of waiting, the 401(k) withdrawal rate has been rising recently.

“Loans from 401(k)s have remained fairly flat over the past several years, although we did see a 4 percent increase in loans from 2006 to 2007,” Ms. Engle said.

Reserve Solutions says its customers withdraw 35 percent less money from their 401(k) plans than they would with direct loans from the accounts. Borrowers also avoid fees they might pay with traditional loans from 401(k) accounts, the firm says.

Fred Barstein, chief executive officer of 401k Exchange Inc., says more than half of his 120 employees chose to participate in the ReservePlus program.

The West Palm Beach, Fla., company is an online consultant for employer benefit programs.

“We’re in the 401(k) industry, so we understand it pretty well,” Mr. Barstein said.

His call center employees generally are not affluent, meaning they are more likely to encounter financial emergencies that might force them to borrow from their 401(k) plans, he said.

Rather than taking out large loans based on their estimates of how much the need, the ReservePlus cards allow them to take out no more than they require.

“I wanted to make that available so they wouldn’t be as penalized if they took money out of their 401(k) plan,” Mr. Barstein said.

Some 401(k) account holders say any withdrawal from their account is out of the question.

“I have considered it and I looked at all the options, but it’s my retirement,” said Teresa Heffernan, a flight attendant who lives in Annapolis. Instead of taking out a loan from her 401(k) account, “I just cut back and find the money,” she said.

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