A Card to Borrow Your Future

Franco Modigliani, left, and Francis Vitagliano, in Modigliani's MIT office about 10 years ago, patented the card idea. (Halyna Vitagliano -- Courtesy Of Francis Vitagliano)

Participants would receive monthly bills that look like credit card statements, and would be required to make minimum monthly payments to their own 401(k) plans, at an interest rate equal to the prime rate, currently 4.75 percent, plus 2.9 percent. (The 2.9 percent would go to ING to cover costs and pay licensing royalties.) Repayment of loans using the credit card would be made over a maximum of four years.

Monthly payments on the card would be made by automated transfer from checking or savings accounts, by telephone transfer of funds, or by check.

If an employee fell three full months behind on payments, he or she would be considered delinquent on repayment and, under Internal Revenue Service rules, the credit card loan would be converted to a 401(k) withdrawal. At that point, the employee would lose use of the card, and the loan would be subject to ordinary income tax plus a 10 percent tax penalty.

Right now, about 18 percent of 401(k) plan participants have loans outstanding. Under federal rules, the loans may not exceed $50,000, and usually must be repaid within five years.

The single biggest drain on 401(k) savings plans, however, occurs when employees leave a job. Frequently, employees withdraw all of their money rather than roll it over into a tax-deferred individual retirement account or their new employer's k-plan. Sometimes, the cash is needed to pay living expenses between jobs. But pension experts warn that many people find the option of a large lump sum of cash from their 401(k) plan irresistible, even if they are not strapped.

In terms of 401(k) loans, companies normally require individuals to repay them completely when they leave their job. This often leads people to convert their outstanding loans to withdrawals, triggering those tax penalties.

One advantage of the new retirement credit card is that individuals would not have to repay outstanding loans when they leave a job, since the loan is being administered by a third-party processing firm, rather than by their former employer. Pension experts say this loan-portability feature of the 401(k) card is likely to reduce withdrawals tied to loans.

Predictions at Odds

Meanwhile, the debate over whether the 401(k) card is a good idea or a bad idea continues, though it has stronger proponents, and fewer adversaries, than it did a decade ago.

Lawrence H. Summers, president of Harvard University and former secretary of the Treasury, said last week that he supports the new card because he thinks it will increase people's willingness to save money for retirement. People are more likely to put money into a 401(k) account, he said, if they can access the funds as needed.

"Modigliani patented a good idea," Summers said in an e-mail. "Anything that encourages individuals to establish separate accounts for their saving is likely to increase personal saving and preparation for retirement. This is important for individuals as life expectancies increase and retirement ages decrease."