Will convenient access to savings in 401(k) plans encourage workers to put away more money for their future or tempt them to drain their retirement accounts?
The debate over that question has raged for nearly 25 years, but the various theories will be tested in the real world soon. A new 401(k) credit card is set to be unveiled today at a financial conference in Washington, D.C. After financial services company ING receives final regulatory approval, the new card will be introduced to employers and 401(k) plan participants, who will be able to borrow their own money without going through a complicated loan process.
As reported by the Washington Post, the new 401(k) credit card will allow workers to borrow no more than 40 percent of the money in the account, or up to $10,000, whichever is smaller. The card would carry a $50 annual fee. Repayment would be made monthly over a maximum of four years.
Workers would be considered delinquent if they missed three months of payments. That would trigger a conversion from a credit card loan to an early 401(k) withdrawal, which carries a 10 percent tax penalty under IRS rules.
The idea is the brainchild of Boston inventor Francis Vitagliano, 55, and MIT economics professor Franco Modigliani, who won the 1985 Nobel Prize in Economics and died last year at age 85.
The men, who started working on the 401(k) credit card in 1980, believed that workers could borrow their 401(k) money at a much lower cost than using credit cards with high interest rates. They also contended that younger employees would be encouraged to sock away more money for retirement if they knew it could be used as needed.
The men patented the card idea and tried unsuccessfully for many years to sell it to banks and credit card companies. They also turned down up to $10 million to sell their patent, instead deciding to continue their hands-on involvement and potentially make more money from royalties.
"The journey has been fascinating," Vitagliano said. "If all we really wanted was to make money, we would have taken the money we invested in getting the patent and bought a fast-food franchise. Our commitment has been to the value of the invention and that it be implemented properly."
Their idea has some powerful critics and supporters.
Lawrence H. Summers, president of Harvard University and former secretary of the Treasury, told the Post recently, "Anything that encourages individuals to establish separate accounts for their saving is likely to increase personal saving and preparation for retirement. This is important for individuals as life expectancies increase and retirement ages decrease."
David Certner, director of federal policy for AARP, however said, “This just sends absolutely the wrong message about savings and especially about retirement savings. This is just one more example of allowing people to cash out."
One thing is certain. U.S. Rep. Earl Pomeroy, D-N.D., a member of the House Ways and Means Committee, said he will closely watch the card's introduction.
"If this is a tightly targeted pilot - that is, indeed a legitimate test of the theory 'Does this help or hurt retirement savings?' - maybe there is some merit in giving it a real-world experiment," Pomeroy said.
He said he fears that easy access to retirement funds will simply mean more debt, not more retirement savings. "The easier the access, the faster the money goes away," Pomeroy said. "That has yet to be disproven. I don't believe there is any significant statistical evidence supporting the view that you facilitate savings by making it easier to spend.”