Economic Crack for Employees - The 401k Debit Card....

Gas prices are up, food prices are up.  The pressure is on from all corners...

Tough economic times mean that your employees will be looking for nickels and dimes in the sofa but also in the the workplace - by looking to tweak their tax withholdings, opt out of medical employee contributions, and other extreme measures.

It's up to you to provide counsel to them.  One tool, that some take advantage of in times like these, is the 401k loan.  It's a bad idea from a retirement standpoint, but part of the plan.  Most 401k loan programs have enough hoops and come with enough penalties and poison pills that employees look elsewhere for cash. 

A new kind of economic crack has hit the streets - the 401k Debit Card....From the Wall Street Journal:

"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.

It isn't 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 isn't just objectionable, it is blasphemous.

The rub is that employees evidently like the ability to borrow; studies show it actually makes them more likely to contribute to a retirement plan. Most 401(k) participants have access to loans and about 20% have gone through hoops and hassles to get one.

Yet employers seem to be drawing the line with the debit card. Although the product has been around for several years, few companies offer it. They are focused more on automatically enrolling U.S. workers in plans, not handing out quick and easy loans.

One advantage of a debit card is that if you are laid off or leave the company, there may be no pressure to reconcile the debt immediately. With a typical 401(k) loan, the outstanding amount must be repaid in full, usually within 90 days. Otherwise the loan amount is considered a taxable distribution."

I'm sympathetic to those that need cash, but the 401k Debit Card makes it too easy.  When a vendor comes around to sell you on these, do humanity a "solid" and just say no...

Comments

[Chris]

Who died and made you God?
I kid; but seriously, what harm can it do to your company to give the employees options they want? After all, it is their life, not yours; and it is their money, not yours. So let them decide for themselves how to hold on to their money and when to spend it. If the employees want the option, and it's relatively costless for the employer to provide it, then why should HR play social engineer?

[KD]

Chris - ouch!!

The good news - no one had to die for me to have this opinion. You're right, it's the employee's money, so ultimately they can do what they want. But a debit card someone can spend at best buy with their retirement money?

Really?

BTW, send in your cable lineup to me on Thursday. I'll map out your weekend viewing to make sure your maximize yourself. :)

Shouldn't you be feeding me sports articles instead of being so critical from your cushy chain on Broadway?

KD

[Chris]

KD,
you must have me confused with someone else. I sit not in a chain, and not on Broadway; but I appreciate the high compliment :)

Every once in a while I gotta throw a little high heat your way... it helps keep ya honest.

As for the sports stories, it is July (the slowest sports month of the year), and I'm completely uninterested in the Farve saga. Manny being Manny just doesn't excite me either. I could whip something up about pay v. productivity at different ages, and connect it to the Pudge and Junior trades, but eh, that doesn't quite excite me today.

You'll have to settle for this instead:
http://www.youtube.com/watch?v=wCF3ywukQYA

[Alan]

Chris,

If employees want access to their cash, they should stick with Visa, Mastercard or their bank debit card. 401(k) plans were not designed to operate in a debit card environment. When 401(k) loans came into the spotlight, they provided employees access to their retirement funds, but came along with a disclaimer that they should only be used when other sources of savings are not available (because you are borrowing against your future retirement savings and could drastically affect the compounding of your retirement funds). For cases of emergency, Hardship Withdrawals are permitted for certain circumstances.

I've been in the 401(k) business for over 20 years and I've always cautioned employees about taking a 401(k) loan, but agree that if used wisely, they can be very useful to employees. If more people were to follow all Financial Analyst's recommendations (to set up an emergency fund for themselves and their families), then we wouldn't need to have this discussion of how accessible money from 401(k) plans should be.

And let's not forget that there is often Company Match that has been given to the employee by the employer. So saying that all the money is the employee's is not quite accurate. Companies provide a match to employees as a retention tool as well as an incentive to save for their retirement. For employees to go through this money to take care of current bills and wishful purchases shows iresponsibility on the employee's part.

Let's just stick with loans (one outstanding at a time) and work on further educating our employees on saving and planning for retirement (as well as life events) so that they can have all of their bases covered and not end up depending upon welfare to fund their retirement down the road.

[Chris]

Alan,
I agree with almost EVERYTHING you said. My point was quite simple, I thought. I don't see why an *employer* should meddle in an employee's personal financial decisions.

The only quibble I have with your comments, is to claim the employer has some right to meddle in the employee's 401K because the employer gives a matching contribution. Don't these plans already have clauses in them that state the employer match doesn't really become the employee's money until after a certain amount of time? And once it becomes the employee's money... (here's the punch line) it's the employee's money. You even said it yourself: "there is often Company Match that has been GIVEN TO the employee by the employer." [emphasis added] When you buy dinner tonight, that money you gave them doesn't give you any right to tell the restaurant owner how to spend that money.

As an employee, I signed up to work for you, not to have you tell me how to manage my personal finances. We already have a paternalist government. Let's not start promoting paternalist employers too.