Government intervention in the free market?

[Le Jacquelope]

Should the Democrats stop this, or leave people to handle their money as they see fit?

Lawmakers seek to ban 401(k) debit cards

By Karey WutkowskiWed Jul 16, 2:06 PM ET

Debit cards linked to retirement savings accounts would be banned under a bill set to be introduced in the U.S. Senate.

Sen. Charles Schumer, a New York Democrat, and Sen. Herb Kohl, a Democrat from Wisconsin, said on Wednesday that they oppose the 401(k) debit cards, which are being revived by companies seeking to capitalize on tightened access to consumer credit.

"After retreating over the last few years, companies looking to raid Americans' 401(k) accounts are making a comeback," Schumer said in a statement.

A companion bill has not yet been introduced in the House of Representatives.

A 401(k) plan is a retirement savings plan that is funded by an employee's pretax salary contributions and grows tax-free. Consumers have had limited early access to their 401(k) funds through low-interest loans or hardship withdrawals.

The 401(k) debit card is a hybrid of a debit and credit card. The monthly bill for using the card includes a minimum payment, interest and fees plus additional interest paid to the card vendor.

Banc One Corp briefly tested a 401(k) credit card in 1996, but the product hit resistance in Congress and did not last long.

"A decade ago, the mere idea of this legislation was enough to get companies to abandon this reckless practice," Schumer said. "This time, we want to push this bill all the way to becoming law."

An estimated $10,000 in retirement income is lost for every $1,000 that an American withdraws from a 401(k) plan, Schumer said.

FINRA, formed last year when stock market regulators NASD and NYSE Regulation merged, issued an investor alert in May about 401(k) debit cards, saying the risks ranged from a reduced savings nest egg to a possible loan default.

With the cards, the total amount the user spends each day, either by swiping the card or writing checks, counts as a single loan. That means a user can accumulate multiple loans, each with different repayment terms.

The amount of total borrowing must be approved by a user's employer, and each loan generally must be repaid in five years or less.

(Editing by Gerald E. McCormick)

Get the Lowdown on the 401(k) Debit Card
'GMA' Financial Contributor Mellody Hobson Gives the Pros and Cons of the Card

March 3, 2008 —

As the threat of recession looms, some people are searching for extra cash to supplement their incomes.

People used to use their homes as piggy banks, but the mortgage crisis has led many to tap into their 401(k)s and now there's even a new debit card that lets you get money from your retirement savings just as you would a checking account.

"Good Morning America" financial contributor Mellody Hobson tells you the smartest way to handle your money and gives you the pros and cons of the new 401(k) debit card plan.

1. How does the 401(k) debit card work?

There is a financial services firm in New York that is now marketing a debit card called Reserveplus, which allows employees an easy way to tap into their 401(k) retirement savings.

The card is essentially a debit card that allows you access to money from an approved 401(k) loan. Like with any 401(k) loan, an employee applies for the loan with his employer.

If the loan is approved, rather than having the loan amount deposited into your checking account, it is deposited into an account and can be accessed through a debit card.

2. Is this a good way for people to cover their expenses when they are a little short or is this a bad idea?

It is a really bad idea. The notion that you can access your 401(k) savings through a debit card is really troubling. I am a huge fan of debit cards as an alternative to credit cards.

As you know, they are an easy way to avoid the trap of overspending because you can only spend what you have in your account unlike a credit card, which lets you run up a balance in excess of what you can afford.

The problem with a debit 401(k) card is that you are really spending money that you do not have. That money should be under lock and key and used only for your retirement, not for a new flat-screen TV or spring vacation.

In some ways it is even worse than a credit card because the money is expensive to borrow and it prevents your nest egg from growing.

If we look at the math you will see what I mean:

Mellody's Math:

An individual with $20,000 saved in a 401(k) account who contributes $100 every month, assuming an average annual return of 8 percent, would have almost $364,000 saved for retirement in 30 years.

However, the same individual who borrows $10,000 from the plan pays the loan back over five years and stops contributing to the plan while paying back the loan. That same individual would have just $203,000 -- a difference of about $161,000.

An easy rule of thumb to remember: Every $1,000 you withdrawal from your 401(k) plan equals about $10,000 less in retirement income.

3. As troubling as the math sounds, you still say more and more people are taking out a loan on their retirement plans?

The reality is, with a slowing economy and trouble in the housing market, consumers are relying on their retirement savings more than ever to pay their bills.

A survey by the Transamerica Center for Retirement Studies revealed that 18 percent of workers had a loan outstanding from their retirement plan in 2007, which is up from 11 percent the previous year. In fact, there are about $49 billion of outstanding loans on 401(k) assets -- a truly frightening number.

4. Are there any conditions under which you would say it's OK to take money out of your 401(k)?

Generally speaking, money invested in your retirement accounts should not be touched until retirement. The one exception is if you have an emergency and have a financial need related to health or even a death.

In fact, most employer-sponsored 401(k) plans allow for these type of "hardship loans." In most cases, even the hardship loans incur a 10 percent penalty and are taxed at ordinary income.

If you absolutely have to take out a loan from your 401(k), you need to prioritize this loan and pay it off first. Also, if possible, do your very best to try and continue to make contributions toward your plan, especially if your employer offers a company match. Passing up this match is the same as saying "no" to free money for your retirement.

4. What should you do if you're in a pinch and need money?

During times of hardship, your first step should be to assess your spending and find ways to cut back. What expenses in your day-to-day activities can you live without? If you are really in a bind and must get a loan, consider a home equity line of credit. Using your house to pay for major expenses and to cover you in a financial shortfall is a much better vehicle than tapping into money that will undoubtedly be your lifeline in your retirement years.

Copyright © 2008 ABC News Internet Ventures

Note: this article doesn't mention the damage a ton of people who do this, would inflict upon the stock market now or in the (retirement days) future. 401(k)'s are typically funded by stocks and mutual funds...

Now, this is why I am harping on the damage this does to the stock market... read this excerpt...

401(k) Debit Cards—Think Before You Swipe

When you use a 401(k) debit card, you are borrowing from your 401(k) account. If your plan allows these cards and you choose to use this feature, your employer must first approve the amount you may borrow based on how much you've saved for retirement. That approved amount of funds is set aside in a separate money market fund and will generally earn dividends on a tax-deferred basis until you use the debit card or write a check against the account. Your returns in this account may or may not be as high as those that your other 401(k) assets could earn. For example, between the years 1926 and 2007, U.S. large cap stocks on the whole earned an annual average return of 10.4 percent, whereas money market funds earned 3.7 percent.

So basically, in many cases, when you do this, you are moving money out of your large cap stock/mutual fund, and that sends miniature ripples into the whole stock market. Loans of this type now number in the billions - $49 billion, in fact. Some portion of that $49 billion have been taken out of the stock market - that's enough to noticeably affect OTHER people's portfolios...

Oops.

 

[Guest]

I'm too drunk.

I'll read this tomorrow.

 

[emap]

Oh my god, who are you and why is Le locked in the closet?

Seriously, you actually managed to post a thread with actual reasoning. Are you sick with something imminently fatal or something?

Anyway, yes they should ban those, i don't understand why people would ever except in the gravest of situations take money out of a 401K. I don't understand the reasoning for having one, I mean retiring is a shortened and nicer way of saying I am old enough to stop doing anything and wait to die. But still if you plan on retiring and want to have a 401K, plan for the charges to said plan and not have to worry about it.

I mean actually in this case for the most part, the government may actually come in and save the complete and utter idiots to be found in this country who for whatever reason assume a 401K plan means they will have $401000 saved up when they retire no matter what they do.

Not to mention those who buy a house they can't afford unless nothing ever breaks, they never get sick, they don't get fired and the price of everything they buy does not go up.

I know I am so off on a tangent but good greif whatever happened to planning for everything taking into account the cost of everything and fiddling the amount of whatever eaten drank or smoked to make room for something new without endangering extra money.

 

[Le Jacquelope]

Oh my god, who are you and why is Le locked in the closet?

Seriously, you actually managed to post a thread with actual reasoning. Are you sick with something imminently fatal or something?

No, it's just that I said something you agree with. If you don't agree with it, you don't think it's well reasoned.

Anyway, yes they should ban those, i don't understand why people would ever except in the gravest of situations take money out of a 401K. I don't understand the reasoning for having one, I mean retiring is a shortened and nicer way of saying I am old enough to stop doing anything and wait to die. But still if you plan on retiring and want to have a 401K, plan for the charges to said plan and not have to worry about it.

I mean actually in this case for the most part, the government may actually come in and save the complete and utter idiots to be found in this country who for whatever reason assume a 401K plan means they will have $401000 saved up when they retire no matter what they do.

Not to mention those who buy a house they can't afford unless nothing ever breaks, they never get sick, they don't get fired and the price of everything they buy does not go up.

I know I am so off on a tangent but good greif whatever happened to planning for everything taking into account the cost of everything and fiddling the amount of whatever eaten drank or smoked to make room for something new without endangering extra money.

But if they ban it, that constitutes Government interference. The Right wingers should be quite horrified about that. I can't wait to hear what Rox or Ami have to say, lol!!!

 

[Handprints]

The only circumstance under which one should borrow from (or against) one's retirement savings when something looks likely to prevent one reaching retirement age. I don't think anyone should be overly concerned with the damage their withdrawal will inflict on the investing masses - if 401K withdrawals are sufficient to do that kind of damage, the market's likely going to be in the tank for long enough to strip the non-professionals (and the bulk of the pros) of their capital anyway. Should the government intervene to prevent such idiocy/irresponsibility? I can't see why: surely it's a fundamental right to piss away one's own money?

 

[emap]

Le you goofball you don't have to say something I agree with. Come to think of it you rarely do, but I always pop in for a good giggle.

What I am saying is, your not taking a weird 20 miles past the freaking wall stance on something in a confrontational way to make everyone else mad. Which actually is where I get my giggles from anyway.

Not complaining this is one of those can't joke about things, well besides the obvious stupidity of those who plan to retire and then spend all the money they are saving for said retirement.

Dangit I'm going off again, I'm trying to say that you are not acting yourself, in this case acting yourself would be really poor taste but still it's weird.

 

[JAMESBJOHNSON]

After reading the paper this morning, I dont think it matters what you do now. Your so-called money is entirely on paper, loaned out for a zillion dubious purposes, and the government cannot bail everyone out if enough of the borrowers fail.

Right this minute I think we're arguing about what to do after the TITANIC sinks.

 

[Roxanne Appleby]

Step back a sec: The premise of the thread is invalid:

"Government intervention in the free market? Should the Democrats stop this, or leave people to handle their money as they see fit?"

401Ks are a legal "construct," a creature of the tax code. They are a form of tax break for middle class savers. They are voluntary - people may "handle their money as they see fit" by participating or not.

They are also a contract, and one with a particular purpose. There are already "escape clauses" in that contract, and they come with penalties.

The question here is, should the party on one side of the contract revise its terms - which it has the right to do - by offering the other party an additional means of exercising that escape clause. The tax break was created to encourage a socially useful form of behavior - saving. Would this proposed revision contribute to that purpose? The question answers itself.

Next issue?

 

[Stella_Omega]

The best advice on anything like this that I've ever gotten was;

"File for bankruptcy before you ever touch your 401k"

 

[Le Jacquelope]

After reading the paper this morning, I dont think it matters what you do now. Your so-called money is entirely on paper, loaned out for a zillion dubious purposes, and the government cannot bail everyone out if enough of the borrowers fail.

Right this minute I think we're arguing about what to do after the TITANIC sinks.

Well, we have Bush out there saying "don't panic, the economy is basically sound." Which pretty much means we're riding in the handbasket. How many more hits can the economy take before we really become the Titanic?

The only circumstance under which one should borrow from (or against) one's retirement savings when something looks likely to prevent one reaching retirement age. I don't think anyone should be overly concerned with the damage their withdrawal will inflict on the investing masses - if 401K withdrawals are sufficient to do that kind of damage, the market's likely going to be in the tank for long enough to strip the non-professionals (and the bulk of the pros) of their capital anyway. Should the government intervene to prevent such idiocy/irresponsibility? I can't see why: surely it's a fundamental right to piss away one's own money?

$49 billion and counting. How far is too far for this economy?

And there is a food chain effect - if we have too many poor elderly people with depleted 401k's, all of society is going to suffer. Starting with lost sales revenue for businesses. Who's gonna make money off the elderly when they have none to spend and the generation behind them has fewer people?

Le you goofball you don't have to say something I agree with. Come to think of it you rarely do, but I always pop in for a good giggle.

What I am saying is, your not taking a weird 20 miles past the freaking wall stance on something in a confrontational way to make everyone else mad. Which actually is where I get my giggles from anyway.

I rarely "take a weird 20 miles past the freaking wall stance" on issues. A lot of my viewpoints are shared by a majority of Americans or are upheld by factual revelations in the future (remember, I DID predict this financial meltdown and everyone said I was an idiot for doing so).

You may not like my stances but if you bet on me you'll stay in the black.

 

[Le Jacquelope]

The best advice on anything like this that I've ever gotten was;

"File for bankruptcy before you ever touch your 401k"

Bingo.

 

[WRJames]

What would stop people from borrowing money from their 491K, putting that money in a back account, and using a debit card to access that money in the bank account?

It sounds like this scheme just makes that process more convenient.

Now, the hand wringing seems to be that people are living beyond their means -- but don't we have home equity loans, reverse mortgages and the like that are equally crazed?

If everyone stopped living beyond their means, the economy would go into a complete tailspin.

Personally, I would think it was a very bad idea to ever borrow against a
401K -- except for a past experience. We had just paid off our mortgage, when it became clear that we were not going survive our children's teehage years without an addition. The last thing we wanted to at that point was go back in debt to pay for it. We had just enough cash on hand to pay for the addition -- but knowing that the 401K money was available as a buffer gave us the guts to go ahead and spend it.

 

[Le Jacquelope]

If everyone stopped living beyond their means, the economy would go into a complete tailspin.

Funny how that's one of those weird 20 miles past the freaking wall stances I've been taking for years now. It's nice to hear someone else out there saying it.

 

[cantdog]

Funny how that's one of those weird 20 miles past the freaking wall stances I've been taking for years now. It's nice to hear someone else out there saying it.

That's one of the reasons I do it.