Bill Modeled After Similar Legislation Filed by Schumer in 1996, Which Caused Banks To Abandon Practice—Until Now
WASHINGTON, DC – U.S. Senators Charles E. Schumer (D-NY) and Herb Kohl (D-WI) announced Wednesday that they are introducing legislation barring companies from offering debit cards that raid customers’ retirement savings by borrowing against their 401(k) accounts. The lawmakers said the practice, recently revived by companies seeking to capitalize on tightened access to consumer credit, is dangerous because it can quickly deplete Americans’ nest eggs.
The senators announced the legislation at a hearing of the Senate Special Committee on Aging, chaired by Kohl. The hearing exposed a range of practices, including the 401(k) debit cards, which draw down on retirement accounts.
“After retreating over the last few years, companies looking to raid Americans’ 401(k) accounts are making a comeback. This legislation will protect people’s nest eggs from companies peddling debit cards that can deplete retirement savings with a simple swipe. A decade ago, the mere idea of this legislation was enough to get companies to abandon this reckless practice. This time, we want to push this bill all the way to becoming law,” Schumer said.
“The point is that 401(k) and similar defined contribution plans were created to ensure that people would have adequate savings for retirement, not as a source of credit to use casually,” said Chairman Kohl. “These debit cards allow participants to use his or her retirement savings to make everyday purchases like buying a cup of coffee. Clearly that’s not what the 401(k) is for.”
The consumer product at issue is a debit card tied to an expense account bankrolled by borrowing against a 401(k) account. The card enables customers to make withdrawals from ATMs or use it to cover purchases of everyday items with a simple swipe. The customer pays interest on all withdrawals from the account tied to the card.
The senators said the product appeared to be an abuse of the intent of 401(k) accounts. Schumer pointed to estimates that for every $1,000 an American withdraws from their 401(k) plan, that translates to about $10,000 in lost retirement income.
The legislation filed today is based on a similar bill Schumer introduced as a member of the U.S. House of Representatives in 1996. At that time, Bank One was marketing a 401(k) debit card similar to the one sponsored by Reserve Solutions today. The company abandoned the practice shortly after the 1996 bill’s introduction, making legislation unnecessary. But in the wake of the revival of the practice, Schumer said this time he would seek to ensure the bill becomes law no matter what.