Lawmakers seek to ban 401(k) debit cards
WASHINGTON (Reuters) - 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)
