401(k) Debit Card Touted in Face of Congressional Attack

Bruce R. Bent, founder and chairman of Reserve Management Corp., defended his company’s debit cards linked to 401(k) plans Thursday by saying that they encourage employees to sign up for the retirement accounts and that they reduce the dollar amount of loans taken out against them.

On Wednesday, Sen. Herb Kohl, D-Wis., and Sen. Charles Schumer, D-N.Y., introduced legislation to ban such cards and limit the number of loans 401(k) participants can take out against their accounts.

Bent said in an interview that his card “program is extremely helpful to attracting lower-income and younger people into the 401(k) plans” and enabling them to “contribute more amounts because they have access to their funds.”

“If they use our program, the money stays within the program until they absolutely need it, which is not the case with traditional loans” taken out against retirement accounts, Bent said.

Reserve Solutions, the unit that runs the program, transfers a 401(k) allocation into a money market account, which earns interest while being available for debit card withdrawals. For example, facing medical expenses totaling several thousand dollars, an account holder could pay smaller initial amounts with debit-card loans instead of taking out one loan up-front to cover the whole amount.

At a Senate hearing Wednesday, Sen. Kohl said 401(k) plans that offer such a card “send the message that it is O.K. to use your retirement savings for everyday purchases, despite the fact that the high fees associated with its use will drastically diminish savings.”

Bent said the debit cards could be controlled to prevent frivolous spending. “What we can do is put filters that would prevent people from shopping at Starbucks or massage parlors” or from withdrawing more than a set amount at any one time from an automated teller machine.

Traditional loans against 401(k) accounts are less flexible than the debit card-linked loans, Bent argued. “When the person borrows money, they’re forced to take a lump sum, which is stupid and not in the best interests of the person.” And if customers with debit card-linked loans lose jobs, they get more time to repay — up to five years, instead of 90 days, he said.

Reserve Management, based in New York, is best known as the company that created the first money market fund. Its Reserve Solutions unit appears to be the only company offering such cards.

The former Bank One Corp. had discussed such a product in 1996 but was dissuaded after Schumer, then a member of the House, introduced legislation similar to Wednesday’s bill (though it was not enacted). A spokeswoman for JPMorgan Chase & Co., which bought Bank One in 2004, said, “For a very brief time in the 1990s, this product was considered but quickly dropped.”

Bent is, nonetheless, relentless. “I will fight Congress if I have to,” he told American Banker, “but I’d prefer to educate them.”

Reserve Solutions introduced the card program in 2003 and now has about 18,000 cardholders. Bent declined to identify the banks that issue the cards.

John Gannon, a senior vice president at the Financial Industry Regulatory Authority, said the longer repayment terms for such loans and the fact that they are placed in sheltered money market accounts rather than withdrawn as lump sums are potential benefits.

But “a 401(k) loan should be a loan of last resort, only used for emergency circumstances” or for things like home purchases or college tuition, he said. “My concern is that the debit card is only going to increase current consumption. You’re not going to use a debit card to buy a house.”