Stage Is Set for Workers to Charge Against 401(k) Savings Accounts

More American workers are discovering the advantages of 401(k) borrowing over conventional loans: Interest rates are lower and plan holders repay themselves instead of a bank via convenient payroll deductions.

About 30% of participants in plans with loan features borrowed against their savings balances last year, with amounts averaging $6,086, and 83.6% of plan sponsors allowed them to do so, according to the Profit Sharing/401(k) Council of America, a Chicago-based trade group.

So, with individuals becoming comfortable with this mode of lending, will a credit card linked to retirement savings plans also fly?

The financial industry, which for years has been urging Americans to save more for retirement, is keeping a wary eye on the Midwest, where Banc One Corp. of Columbus, Ohio, plans to test-market a 401(k) Visa by early October.

The overall profit potential is certainly great. There are an estimated 228,000 plans covering 22.3 million employees, with assets of about $675 billion.

401(k)s are voluntary savings accounts that let employees designate a portion of pretax income to be invested in various ways. The money grows tax-deferred until withdrawn.

The IRS, which places penalties on early withdrawals, will let employees borrow half their 401(k) balance, or up to $50,000. A loan used to buy a house can be repaid over 15 or 30 years. Loans for other uses, such as a car or college education, must be repaid within five years.

American United Life, an Indianapolis-based insurer that manages 9,000 retirement savings plans with 400,000 participants, is the first company to sign on with the Banc One card. Banc One itself also expects to make the card available to its employees by early 1997.

Only plan sponsors can offer the credit card to their participants, says Karen Barrett, a bank spokesperson. However, she said, some bank customers have already expressed an interest in eventually obtaining it and several companies have made inquiries.

The card, which would carry a $20 annual fee, lets employees charge up to 40% of their 401(k) vested balance, up to $10,000. They would repay their accounts at the prime interest rate, now 8.25%, plus 2% to 4% of the outstanding balance, the latter of which would go to Banc One, Barrett said.

The rate of between 10.25% and 12.25% is below the average bank credit card rate of 17.5% but higher than commonly charged rates on 401(k) borrowing plans of usually a percentage point above prime.

There are several advantages to the credit card. The money comes a lot faster and can be borrowed in small increments. (Typically, there’s a $1,000 minimum on a 401(k) loan.) However, you have to write a check each month rather than repay by payroll deduction, which could make defaulting easier.

Opponents see other disadvantages to using long-term savings slated for retirement to secure routine credit card charges:

Cardholders would probably have to keep their credit line in a money market or fixed-income fund. They would also be paying Banc One for the right to use their own money.