401(k) card makes borrowing easy
By David A. Vise
Washington Post
WASHINGTON — For a quarter-century, a Boston inventor has been obsessed with a single idea: an innovation that would give millions of American workers the chance to borrow their own money from their 401(k) savings plans using a new kind of credit card.
In 1980 the inventor, an animated fellow named Francis Vitagliano, shared his concept with an MIT professor, Franco Modigliani. The Italian-born economist had been writing for 20 years about his theory of how and when people spend and save money during their lifetime, the so-called Life-Cycle Hypothesis.
Modigliani's work would win him the 1985 Nobel Prize in economics, but the call from Vitagliano would, he thought, give him a way to test his theory in real life.
The men became champions for this new financial instrument, spending untold sums for a patent on the card idea, trying to sell it to banks and credit card companies, and withstanding a barrage of criticism from members of Congress and the financial community.
Franco Modigliani died last year at age 85. But on Monday, Francis Vitagliano, now 55, watched as the 401(k) card was unveiled at a financial conference in Washington.
An official of ING, the global financial services company that has licensed Patent No. 5206803, is introducing the card to employers and their k-plan participants soon, after receiving final regulatory approval from the state of Connecticut.
In this time of worry about the American retirement system, the card will once again cause a flap — but possibly not as much as it has in the past.
Working in the pension-compliance field, Vitagliano had his breakthrough idea about the retirement card decades ago when 401(k) savings accounts were in their infancy. But even then, he could see that workers would apply to borrow some of the tax-deferred savings from their k-plans, putting employers through a cumbersome process to approve loans for purchase of a principal residence or education or large medical expenses.
It would be a laborious process at best, one that employers and plan administrators would grow to dislike as much as the employees did. A 401(k) card would make the process much easier.
He and Modigliani also shared the belief that a 401(k) card would give workers the chance to replace costly credit card debt, often bearing interest rates above 20 percent, with lower-cost money from their own savings. They also held fast to the view that easier access to 401(k) savings would encourage more employees, especially younger ones, to put greater sums of money away for retirement, knowing that they weren't locking it away for decades.
Each of those ideas had powerful critics.
In the mid-1990s, Vitagliano and Modigliani appeared on the verge of success after licensing their patent to Banc One, a major Ohio bank that was ready to roll out the credit card. But they ran into opposition.
The retirement card would cause people to drain their 401(k) accounts, said then-Rep. Charles Schumer, D-N.Y., who introduced a bill to block it.
What about the chance for people to replace those high-interest-rate credit cards? The major credit card companies lobbied hard to derail the concept.
Facing the political heat, Banc One dropped the idea.
The debate over whether the 401(k) card is a good or bad idea continues, though it has stronger proponents, and fewer adversaries, than it did a decade ago.
Lawrence 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.
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," Certner said.
Alicia Munnel, director of the Center for Retirement Research at Boston College, said her initial concerns that the card would drain 401(k) savings have been addressed in part by an imposition of a $10,000 maximum on what can be borrowed.
