After signing up for the ReservePlus loan program, participants transfer a portion of their 401(k) assets into a money market fund from which they are free to draw whenever they wish. They can either use a ReservePlus loan card at an ATM or store, or ReservePlus checks.
Eric Lansky, a managing director at the Reserve, says the goal was to create a product that resembled a home-equity line of credit. “You get this debit card or checks, and you can now tap into that 401(k) if you need to borrow.”
To borrow, participants pay an annual rate that’s 2.9 percentage points above the prime rate; the portion represented by the prime rate goes back into their account, while the 2.9 percent is the Reserve’s fee. Borrowers also pay an initial setup fee and a yearly maintenance fee, which are set by the record keeper. (ReservePlus is currently available on the Omniplus record-keeping platform and will soon be available on the SRT and InvestLink platforms.)
Making it easier for 401(k) investors to borrow from their savings seems to run counter to the goal of helping workers build a nest egg for retirement. But most 401(k) plans do allow loans, in the belief that workers are more likely to participate if they can access their money prior to retirement. A 1997 study by the Government Accountability Office confirmed that allowing loans increases participation in 401(k)s, especially among lower-income employees, and it also concluded that employees in plans that permit loans contribute more.
A survey by the Profit Sharing/401k Council of America (PSCA) found that 85 percent of 401(k) plans allow loans, and about 25 percent of workers in those plans take them.
But PSCA president David Wray says that in the past, plan sponsors were wary of proposals to enable 401(k) loans with credit cards.
“They have a loan program so that they can entice employees who would not save in the plan without some kind of access to their money,” Wray says. “But they typically do this as an accommodation, not as an additional employee benefit.”
Lansky says that ReservePlus relieves plan sponsors of the administrative work involved in 401(k) loans. “We originate the loan and we collect the loan,” he says.
Christopher Van Aken, an account manager at GMR Associates, an investment advisor in Rochester, New York, that offers ReservePlus to its clients, says that when “HR and payroll people find they’re no longer going to be in the loan business, they’re the happiest people in the world.”