401(k) card a sure way to more debt

By Al Lewis
Denver Post Business Columnist

Just what America needs, a 401(k) credit card.

Simply proffer the plastic and borrow from the future.

If these retirement accounts can survive corporate scandals and stock-market meltdowns, why not just give folks a credit card to tap their 401(k)s any time they want? Why worry about retiring when the U.S. economy needs big spenders right now?

ING, the global financial-services giant, was just about to unveil its controversial 401(k) card at a financial industry conference, according to an Oct. 24 report in The Washington Post. But the announcement never came.

"After weighing the pros and cons, we have decided to not actively pursue it at this time," Caroline Campbell, a spokeswoman for ING U.S. Financial Services, told me.

She didn't enumerate these pros and cons, but I can guess what they are.

On the pro side, ING can make a kill-ING charging consumers interest and fees to borrow against their own 401(k) accounts.

On the con side, reckless consumers might start blow-ING their retirement to support frivolous lifestyles.

Add an ailing Social Security system - and attempts to privatize it - along with disappearing corporate pensions and we may soon be a nation of geriatric bankruptcy filers.

Conceptually, the 401(k) credit card has been around since 1980, but it has never been launched. It just can't overcome the controversy it generates.

Americans have racked up a record $2 trillion in credit-card, revolving-loan and auto-loan debt. That doesn't include home mortgages and refinancings that allow folks to spend all the equity in their homes and be life-long slaves to debt.

Most companies already let employees borrow against their 401(k)s. Currently, employees can borrow up to $50,000 from their 401(k)s as long as it's paid back in five years.

Only about 18 percent of people with 401(k)s have taken such loans. Do we really want to encourage more? Do we need 401(k) credit cards for every consumer impulse?

"The whole idea is that a 401(k) is for retirement," said David Halseth of The HCM Group Inc., a Broomfield-based pension consultant. "When you make it so easy to borrow, it sends the wrong message."

Nevertheless, the card's inventors believe it's an idea worth patenting. Patent No. 5206803 belongs to Boston inventor Francis Vitagliano, 55, and the estate of MIT professor Franco Modigliani, who won the Nobel Prize in Economics in 1985 and died last year at age 85.

Vitagliano and Modigliani have argued that the card, when used responsibly, creates inexpensive credit and encourages people to start 401(k)s.

Ohio-based Bank One licensed their credit-card patent in the mid-1990s but never did anything with it. More recently, ING licensed it.

Here is what ING considered, according to The Washington Post:

Consumers would pay a $50 annual fee, with interest charged at the prime rate - which is now 4.75 percent - plus 2.9 percent.

The prime-rate interest is returned to the 401(k) account. The 2.9 percent would go to ING for its nifty system that lets people borrow their own money with the flash of a Visa or MasterCard.

To keep things from becoming ridiculous, the credit limit would be $10,000.

This credit is dangerous. Lose your job and you may be expected to pay off your credit balance in full.

If you can't do that, the IRS will tax what you've withdrawn from your 401(k) and impose a 10 percent penalty.

Nothing like getting the largest tax bill of your life when you can least afford it.

If the 401(k) card still sounds like an idea worth patenting, I have several ideas that I'd like to propose:

How about about a Vital Organ Visa to unlock the transplant value of your heart, liver and kidneys?

Or the My First Son MasterCard or the Sweet Daughter Discover? Pay your bills or relinquish your children to lives of involuntary servitude. If retirement isn't too sacred to risk with a credit card, why should anything else be?by calling 1-800-829-0433. simply a worry and nothing else.

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