401(k) debit cards are an oxymoron

Our consumer-driven society has long since sped through the intersection where discretionary spending meets available income. Concepts such as "saving for a rainy day" or "saving for retirement" seem, at best, quaint. The glare of the latest "gotta have it" item blinds most Americans to the long-term consequences of its purchase. With this mind-set behind the wheel, too many workers are heading for a financial crackup. Amid the credit crunch, many home foreclosures, soaring health care bills and runaway energy costs, the last thing our nation needs is to add more fuel to the financial fire. Yet we are about to do just that. The 401(k) debit card provides consumers with a plastic passkey to their retirement savings. The 401(k) debit card (the term is an oxymoron) provides the holder access to a "loan-processing service" and is marketed in particular to employers with young work forces. The message is that one's next financial fix is just a swipe away. The reality is that 401(k) debit cards are economic poison. Their widespread use will have dire consequences not only for American workers and future retirees but for the fiscal health of this nation. The promotion and distribution of these new debit cards linked to long-term retirement savings accounts are encouraging irresponsible spending. The monthly bill for using the card includes a minimum payment, interest and fees plus additional interest paid to the card vendor. Allowing workers to borrow easily from their retirement accounts is at best reckless and at worst financially destructive.
In a warning to investors, the Financial Industry Regulatory Authority Inc. of New York and Washington said, "Regardless of how easy it might be to do, borrowing against your retirement savings should be a last, not a first, resort — and done only in emergency situations." Likewise, the Securities and Exchange Commission warned, "Unlike your 401(k) contributions, you must make repayments on your own, and not automatically through a payroll deduction, and you should think carefully before taking money out of your retirement account under any circumstances." Sens. Herb Kohl, D-Wis., and Charles Schumer, D-N.Y., are pushing legislation to ban 401(k) debit cards. At a recent Senate Special Committee on Aging hearing, Mr. Schumer said: "A decade ago, the mere idea of this legislation was enough to get companies to abandon this reckless practice. This time, we want to push this bill all the way to becoming law." Mr. Kohl, the committee chairman, added: "These debit cards allow participants to use his or her retirement savings to make everyday purchases like buying a cup of coffee. Clearly, that's not what the 401(k) is for." The 40l(k) is a long-term retirement savings vehicle, not a revolving line of credit. Clearly, this is an abuse of the intent of 401(k) accounts. Research points to estimates that every $1,000 withdrawn from a 401(k) plan translates into about $10,000 in lost retirement savings. Proponents of the cards (and I hope there are few) suggest that 401(k) debit cards are good for those who are reluctant to participate in retirement programs, because they know that their savings won't be locked up for decades. But is that not the point? You should be locking up your savings for decades. That is why it's called "retirement" savings. Despite statistics from researchers at Chicago-based Spectrem Group indicating that 401(k) plan participants are much more educated than the overall national work force, the essence of this debate is that 401(k) debit cards make it easier to spend than to save. Individual retirement accounts have been around since 1974, but fewer than 35% of workers use them, mostly because they are too complicated to set up. IRAs are fine if you have the time and the know-how to navigate the rules, but what are we going to do about young, less educated, lower-income workers? Instead of handing them yet another spending instrument, we should find ways to provide them with a better tool for savings. And we should make it easy to use. We should enable citizens to have private retirement accounts or portable 401(k) accounts that they would use in addition to their traditional Social Security benefits. It can work like this: On workers' W-4 forms, a new box would be added to permit a "checkoff" of the amount of after-tax dollars workers want placed into their new retirement savings account. This would be similar to the process of checking the number of withholding allowances on the same form. Workers would be given the choice of checking off 1%, 3% or 5% of after-tax dollars, with a minimum of 1% going into the account and a default of 3% for those not making a choice. The check-off money would be invested in stable portfolios, and the entire program would be managed by the Department of the Treasury, similar to the way the Thrift Saving Plan is administered for federal employees by the independent Thrift Investment Board. Workers would have the option of investment styles suitable to their age at the start of the program so that there would be more-aggressive investing for those under 40 and a more conservative approach for those over 40. The money held in this account would accumulate tax-free and be accessible to each individual at retirement tax-free. These checkoff accounts would encourage individuals to save and help provide a real retirement nest egg for Americans not likely to have one, and it would ensure actual funding. Under this proposal, every worker would have such an account. Our nation needs an open discussion about the significance of saving for retirement, and we must find ways to educate and encourage all citizens to contribute to their future. It is time to redirect the national attention from spending to saving. I welcome fellow readers of InvestmentNews to share with me their ideas on how to stimulate more retirement savings. The least our fellow executives can do is ask if their firms are offering 401(k) debit cards and put an end to this practice. Christopher L. Davis is president of the Washington-based Money Management Institute, a trade group of financial services companies that provide financial advice and professionally managed solutions to individual and institutional investors.