Banc One develops credit cards for 401(k) loans

COLUMBUS, Ohio -- On one hand, the program will make it easy to take advantage of retirement savings for current expenses and borrow money at a cheaper rate than ordinary credit cards.

On the other hand, it may encourage spending instead of saving and cut into funds workers have at retirement.

Banc One, the Columbus-based parent of Bank One Oklahoma City, wants to offer employees with 401(k) plans Mastercard or Visa credit cards to borrow from their retirement savings. Currently, Banc Ones proposal is being reviewed by the Internal Revenue Service, which enforces 401(k) regulations.

If approved, Banc One plans to begin offering the cards this fall to employees of a company that has yet to be chosen, said John Russell, the company's chief of communications.

Russell said Banc One is not ready to release all the details of its plan, but confirmed published reports that the card would work like this:

Companies with 401(k) plans would enter agreements with Banc One to issue Mastercard or Visa credit cards as an added employee benefit. The cards would be good for purchases and cash advances.

Employees approved for credit would be able to borrow up to 40 percent of the balances in their accounts. The total line of credit could not exceed $10,000. The amount of the credit line would be kept in a money market or fixed income fund.

As borrowers paid off their charges, they would pay an interest rate on their loan balances equal to the prime rate (currently 8.25 percent). Interest would accrue from the time of purchase; no grace period is included. That interest money would be added to their retirement accounts to replace interest their retirement fund would have generated.

The borrowers would pay an additional 3 or 4 percent in interest to Banc One as a fee for credit services. The total interest would be 11.25 to 12.25 percent, significantly lower than the 17.4 percent average reported recently in Bank Rate Monitor. The cards would also carry a $20 annual fee.

Russell said Banc One sought confirmation from the U.S. Department of Labor and the Internal Revenue Service that its proposal is legal and got positive answers from both agencies.

Internal Revenue officials said they were not permitted to discuss their communications with Banc One.

Bette Briggs, a spokeswoman for the Labor Department, said Banc One sought an advisory opinion on a narrow legal issue only, and didn't ask if its proposal was legal.

However, she said borrowing from 401(k) accounts is not illegal, and about 20 percent of workers with such accounts have outstanding loans. She also said other banks have inquired about similar proposals, but Banc One is the furthest along in its planning.

Financial planners, in general, have taken a dim view of the idea of a 401(k) credit card.

Michael Scarborough, president of The Scarborough Group, Annapolis, Md., a manager of 401(k) investments, said several issues make borrowing from retirement funds something that shouldn't be done lightly.

He mentioned the possible instability of Social Security, job mobility and downsizing.

"Add to this a credit card that makes it easier to pull money from a 401(k) plan, which is one of the few places where people will put away some money for retirement," Scarborough said.

"I think what it amounts to is giving heroin to an addict."

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