In every great epic, there can't be a hero without a villain. Superman needed Lex Luthor. Batman needed the Joker. And - in a retirement benefits battle of good versus evil - a debit card that makes it easier for seniors to receive and access Social Security payments has a true foil in a card that can shrink employees' retirement savings with just one swipe.

Employee Benefit News, along with two of its sister publications across SourceMedia Inc., detail the two cards, their benefits and drawbacks, and current and pending federal regulations surrounding them to better inform plan sponsors, so they can educate employees and retirees accordingly.

Treasury offers Social Security debit card

Starring as the angel in this scenario and signaling a further effort by the government to move toward electronic technology, the Treasury Department will begin offering Social Security recipients the option of receiving payments by debit card instead of traditional checks.

"The explosive growth in the prepaid card industry offers an important opportunity for the Treasury to give unbanked payment recipients secure, easy access to their funds at low or no cost to the cardholder," says Treasury Financial Management Service Commissioner Judy Tillman.

There could be a use for debit cards or data aggregation for fund companies that deal with retirement income distributions, says Mike McLaughlin, a manager at Kasina, a New-York based consulting firm. However, he is not aware of any companies currently considering it.

"A lot of defined contribution plan providers are thinking about how to provide a more holistic financial picture for their clients, McLaughlin says. "I can see how data aggregation could fit there. You've got a pool of money coming on a regular basis, and you want to have access to it."

Treasury's move is part of a broader effort by federal agencies to move away from paper communications and payments toward instant, electronic methods.

The mutual fund industry and the Securities and Exchange Commission are preparing to transition toward electronic prospectus profiles this year, which could save the industry $300 million a year in printing and shipping fees. Besides the savings in cost and resources, electronic communications are also more convenient for the average user, who has become much more comfortable with computers and the Internet in recent years.

Many state agencies currently offer prepaid debit cards to recipients of unemployment benefits, child-support payments and emergency-relief funds for hurricane victims. The transition is free and completely voluntary.

Customers who sign up to receive their payments through direct deposit or by debit card have faster access to their money and avoid security problems like stolen checks.

At the International Consumer Electronics Show in Las Vegas, Microsoft's Bill Gates said the "first digital decade," which centered on the keyboard and mouse, is over.

"The second digital decade will be more focused on connecting people," he said, adding that technology will continue to become easier for the average consumer to use.

After last year's successful pilot program with Social Security debit cards in Illinois, the Treasury Department announced a plan earlier this year to first roll out the cards in Texas, Oklahoma, Louisiana and Arkansas, then nationwide.

Comerica Bank is offering the debit cards, called "Direct Express."

"In the pilot program, 85% of respondents said they were satisfied, and 88% said they would recommend it to their family or friends," says Ronda Kent, director of the agency enterprise solutions division of the Treasury.

Based on 2006 costs, Tillman said the department will save 80 cents for every payment that uses the cards instead of checks, and switching all of the nation's four million unbanked benefit recipients could save the department $44 million a year.

Approximately 28% of Social Security recipients don't have bank accounts, according to the Treasury. Recipients who rely on checks face a greater risk of check delivery delays due to poor weather, national or local emergencies, and lost or stolen checks. There were 58,000 cases of forged Social Security checks last year, Tillman said, and nine out of 10 people experienced problems with check payments.

The federal government is in the process of moving all payments from checks to debit cards and direct deposit, says Treasury spokeswoman Alvina McHale.

The Treasury Department's "Go Direct" campaign has already seen 1.6 million customers switch from paper checks to direct deposit. "The Direct Express card provides an opportunity for people outside of the banking system," says Nora Arpin, director of government electronic solutions for Comerica, "either because of personal choice or perhaps their inability to obtain a bank account, to gain a foothold in the financial mainstream."

While there is no monthly maintenance fee and free point-of-sale transactions for cardholders, Comerica will earn money on cardholder fees, interchange fees at the point of sale and the float on funds in cardholder's accounts.

Cardholders get one free ATM cash withdrawal per month, but Comerica will charge 90 cents for each additional withdrawal. Cardholders can avoid surcharges by using any of the 56,000 designated ATMs, including ATMs at PNC Bank and 7-Eleven, but may face surcharges at other ATMs.

401(k) debit cards attacked

The debit card devil takes the form of a 401(k) debit card, which would allow plan participants to use their retirement savings to pay for anything from emergency purchases - medical care or car repairs - to frivolous ones, like vacations, clothes or their morning coffee. Each purchase would be considered a separate plan loan with its own interest fees.

Congress is considering legislation, introduced by Sens. Herbert Kohl (D-Wis.) and Charles Schumer (D-N.Y.), that would ban such debit cards, made popular by companies like Reserve Plus. The measure also would limit the number of hardship withdrawals participants are allowed to make and effectively prevent plan participants from taking loans out of their 401(k) accounts to pay for nonhardship and preretirement expenses.

Some lawmakers argued that the average American has already saved too little for retirement and thus should not be allowed easy access to funds.

However, Bruce R. Bent, founder and chairman of Reserve Management Corp., defended his company's debit cards at a Senate hearing this summer, saying that they encourage employees to sign up for the retirement accounts and reduce the dollar amount of loans taken out against them.

Bent said in an interview that his card "program is extremely helpful to attracting lower-income and younger people into the 401(k) plans" and enabling them to "contribute more amounts because they have access to their funds."

"If they use our program, the money stays within the program until they absolutely need it, which is not the case with traditional loans" taken out against retirement accounts, Bent said.

At the same hearing, Sen. Kohl said 401(k) plans that offer such a card "send the message that it is OK to use your retirement savings for everyday purchases, despite the fact that the high fees associated with its use will drastically diminish savings."

Bent said the debit cards could be controlled to prevent frivolous spending. "What we can do is put filters that would prevent people from shopping at Starbucks or massage parlors" or from withdrawing more than a set amount at any one time from an automated teller machine.

Traditional loans against 401(k) accounts are less flexible than the debit card-linked loans, Bent argued. "When the person borrows money, they're forced to take a lump sum, which is stupid and not in the best interests of the person." And if customers with debit card-linked loans lose jobs, they get more time to repay - up to five years, instead of 90 days, he said.

Reserve Management, based in New York, is best known as the company that created the first money market fund. Its Reserve Solutions unit appears to be the only company offering such cards. The former Bank One Corp. had discussed such a product in 1996 but was dissuaded after Schumer, then a member of the House, introduced legislation similar to the current bill (though it was not enacted).

Bent is, nonetheless, relentless. "I will fight Congress if I have to," he told EBN sister publication American Banker, "but I'd prefer to educate them."

Reserve Solutions introduced the card program in 2003 and now has about 18,000 cardholders. Bent declined to identify the banks that issue the cards.

John Gannon, a senior vice president at the Financial Industry Regulatory Authority, said the longer repayment terms for such loans and the fact that they are placed in sheltered money market accounts rather than withdrawn as lump sums are potential benefits.

But, he emphasizes, "a 401(k) loan should be a loan of last resort, only used for emergency circumstances" or for things like home purchases or college tuition."

"My concern is that the debit card is only going to increase current consumption. You're not going to use a debit card to buy a house."

One reader's opinion

A reader who saw our previous coverage of the 401(k) debit card legislation on BenefitNews.com made the following comment on our site:

It is not surprising that this bill is being pushed by these two particular senators.They, along with the rest of Congress, are responsible for creating the fiscal debacle that the country now faces. I think removing the debit card feature is a good idea, as it makes access to the funds in one's retirement plan too easy; however to restrict the access via loans or limiting the hardship rules goes too far.

For example, which is a better plan for financial security in retirement? To lose 12% to 18% of the value of your plan, or to take out a loan to pay off high-interest consumer debt and pay back the borrowed monies to yourself at a positive interest rate?

These two gentlemen don't have to worry about paying bills or how they will handle their finances in retirement - the rest of us ordinary citizens do. They should leave us alone.

EBN Associate Editor McLean Robbins and her colleagues at two EBN sister publications, Money Management Executive's John Morgan and American Banker's Maria Aspan, compiled this report.