When the House of Representatives holds a hearing on the merits of 401(k) debit cards, and even Arthur Levitt, the former chairman of the Securities and Exchange Commission, says tapping into that equity might be a “creative way to stimulate the economy”—you know they pose a serious threat to both the mutual fund industry and investors’ retirement.

 

The main argument in favor of permitting such access to one’s hallowed retirement savings is that studies have shown it prompts lower-income and younger investors to save. And, according to The Reserve, which offers such a card to some 18,000 people, it also results in lower withdrawals, even though $50,000 is the legal limit people can withdraw.

 

In addition, debit cards linked to defined contribution plans typically give people up to five years to pay back the money, whereas traditional 401(k) loans must be repaid in 90 days in the event a person is laid off or leaves a company.

 

The industry, understandably, is against 401(k) debit cards, as they go against the very principal of long-term savings, and some fear that they could further exacerbate the current credit crisis, much like home equity loans have.

 

“We absolutely hate it,” Jean Stezfand, director of financial security at AARP, is quoted in today’s Wall Street Journal. “A 401(k) loan is a last resort.” And the Financial Industry Regulatory Authority recently issued a warning to investors against a 401(k) debit cards, calling them “a tempting convenience that can have significant repercussions” on retirement.

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