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    Briefly Noted

    401(k) Debit Cards: Think Before You Swipe

    Many Americans tap their retirement savings before they retire, potentially harming their efforts to provide for a financially secure future. With the advent of a recent product—the 401(k) debit card—borrowing from a retirement savings account is as easy as swiping and spending.

    However, according to the Financial Industry Regulatory Authority (FINRA), there are many potential pitfalls that investors should be aware of.

    When you use a 401(k) debit card, you are borrowing from your 401(k) account. If your plan allows these cards and you choose to use this feature, your employer must first approve the amount you may borrow based on how much you’ve saved for retirement. That approved amount of funds is set aside in a separate money market fund and will generally earn dividends on a tax-deferred basis until you use the debit card or write a check against the account. Your returns in this account may or may not be as high as those that your other 401(k) assets could earn.

    You don’t need separate approval for each transaction. The total amount that you borrow each day, whether by swiping your card or writing checks, is aggregated and counts as a single loan. This means you could have multiple loans, each with a different repayment term. Generally the amount of total borrowing may not exceed the amount that has been approved. If it does, your employer may impose a penalty or may approve the additional amount—it depends on the employer’s plan guidelines.

    FINRA warns that interest and fees can add up. Interest rates generally are tied to the “prime rate” as with traditional credit cards. The 401(k) debit card also carries an additional charge based on the amount you borrow (referred to as a “margin”) that is paid to the debit card vendor.

    In addition to finance charges, there are fees associated with the 401(k) debit card:

    • There may be a set-up fee and an annual fee associated with your card;

    • A cash advance fee (currently $2.00) is charged every time you use the debit card to obtain cash at an ATM or bank, regardless of which ATM or bank you use; and

    • Return payment fees and fees for express delivery services can also apply.

    Be sure to read your disclosure documents to make sure you understand all the fees, as well as the other conditions associated with your card.

    As with a traditional 401(k) loan, the money that you borrow using a 401(k) debit card must comply with IRS restrictions and other terms that your employer may put in place. Each loan made with your 401(k) debit card generally must be paid back in five years or less. If you’re using the money to buy your primary residence, your plan may allow for a longer repayment period. You must also make regular payments that include both interest and principal at least every three months.

    If you do not pay your loan back in time—or fail to make payments for three consecutive months—your loan will be considered to be in default and treated as a 401(k) distribution. This means that you’ll have to pay taxes on your loan balance and, unless you’re already 59½ or older, you’ll owe a 10% penalty as well.

    In a more traditional 401(k) loan, the interest you pay goes right back into your 401(k) account and can come straight from your pay through payroll deduction. With a 401(k) debit card, however, payroll deduction is not currently available. Like your other bills, you must repay yourself using checks, automatic transfers from a bank account of your choosing, or wire transfers. Also, only part of your interest goes back into your 401(k) account—the remainder goes to the debit card vendor.

    FINRA’s bottom line warning: borrow only as a last resort. Remember that with every swipe comes the potential to wipe out a portion of your hard-earned retirement savings.

    For more on 401(k) debit cards, go to the Investor Information section at www.finra.org.

    PAUSE to Check on FakeSEC Registrations

    A new resource from the Securities and Exchange Commission can help investors avoid on-line and boiler room scams. The SEC’s new PAUSE program (for Public Alert: Unregistered Soliciting Entities) lists information the SEC has received through complaints from investors and others—including foreign securities regulators—about securities solicitations made by entities that falsely claim to be registered in the U.S., use phony U.S. addresses or provide fake endorsements from fictitious government agencies or international organizations.

    In some cases, the complaints are about entities claiming to offer investments endorsed by governmental agencies, including the SEC. These claims are important because when an entity claims to be registered with the SEC, it is in effect claiming that it has made itself available for SEC regulation and oversight.

    The list does not include all unregistered entities or entities that have been the subject of complaints received by the SEC. In addition, inclusion on the list does not mean the SEC has concluded that a violation of the U.S. securities laws has occurred or that the SEC has made any judgment about the merits of the securities being offered by these entities.

    The regularly updated list can be found on the SEC Web site by going to the Investor Information section and clicking on PAUSE; alternatively, go directly to the Web page at sec.gov/investor/oiepauselist.htm.

    Source: Securities and Exchange Commission, www.sec.gov.