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)

David Certner, director of federal policy for AARP, strongly disagrees, saying the card will lead people to deplete their 401(k) savings. "People are not saving enough for retirement. This just sends absolutely the wrong message about savings and especially about retirement savings. This is just one more example of allowing people to cash out."

Alicia Munnel, director of the Center for Retirement Research at Boston College, said the new retirement card is ready to be tested in the marketplace. Her initial concerns that the card would drain 401(k) savings have been addressed in part by the imposition of the $10,000 maximum on what can be borrowed.

"The fact that it has a cap makes me less worried than I was initially," Munnel said in an interview. "I started out very skeptical. The upside potential is if people feel they have access to these funds and can use them for regular expenditures, it may make it more appealing to join plans, and increase participation. On the other hand, if the $10,000 limit is the camel's nose under the tent, that would be a bad development."

That's what worries Rep. Earl Pomeroy (D-N.D.), who describes Vitagliano as a friend. A member of the House Ways and Means Committee, Pomeroy said he will be monitoring the introduction of the card closely.

"If this is a tightly targeted pilot -- that is, indeed a legitimate test of the theory 'Does this help or hurt retirement savings?' -- maybe there is some merit in giving it a real-world experiment," Pomeroy said. "If, however, this is the foot in the door and an effort not to study it but to blow this wide open across 50 states, I will be opposed to it."

Instead of using the new retirement card to replace costly credit cards, Pomeroy fears, workers will just add to their debt load.

"The easier the access, the faster the money goes away," Pomeroy said. "That has yet to be disproven. I don't believe there is any significant statistical evidence supporting the view that you facilitate savings by making it easier to spend. This whole idea makes sense only if the biggest obstacle to people putting money into retirement accounts is their loss of liquidity, or immediate access to the money. In my own view, that has not been sufficiently established."

What nobody can know for sure -- until after ING begins rolling out the card with some of the 401(k) plans it administers -- is how popular the card will prove to be, and whether the easier availability of loans will alter people's borrowing and repayment habits.

"We are exploring this as a product-enhancement concept, and this is consistent with our ongoing interest in new ideas that may give rise to savings incentives," ING spokesman Philip Margolis said.

Lyn Dudley, a retirement expert, said her parents paid for her college tuition at Vanderbilt University using money from their 401(k) plan that they later repaid in full. She predicted that the new 401(k) card would lead to some increase in borrowing, but not much.

The credit card industry is not opposing the card's introduction, in part because the first 401(k) card will be a Visa card. In addition, ING is willing to sub-license the rights to the product to other financial services firms, which means that eventually there may be 401(k) American Express and MasterCards too.

The Labor Department and the Internal Revenue Service have approved the use of credit cards for 401(k) loans. Dudley said credit card borrowing rather than loans through employers would cut down on the cost and hassle of administering loans because sophisticated credit card technology would be used to track repayment. She also said ready access to loans through credit cards may encourage people at lower income levels to put more money into the plans.

"Most people accept the fact that having a loan available in your 401(k) plan up to a certain point encourages people to participate at good amounts," Dudley said. "I venture to guess there will be some increase in loans with credit cards, but not as much as you would have feared."

The Exchange

Last year, Modigliani passed away, his life ending before the new retirement card made it to market.

Vitagliano recalled one conversation with the economist about whether they would have been better off selling the patent for millions of dollars years ago and moving on to other things, rather than struggling together for so long.

"Remember," the economist said to his partner, "we have had over 20 years of close friendship. That is worth dramatically more than they were offering us."

David Vise will conduct a live online chat about the new 401(k) credit card at 1 p.m. tomorrow at www.washingtonpost.com.