Many believe the idea of making it easier for retirement plan participants to borrow against their savings is borderline reprehensible given anemic employee savings.

Yet experts also know that most plans not only make loans possible, but also that workers occasionally need to raid their retirement cupboard. The question then becomes one of, if workers are going to do it, what can an employer do to make it as painless as possible? That's where The Reserve, a company famous for its money market fund work in the 1970s, says it can mitigate the impact of plan loans.

David Young, director of the ReservePlus program, sees this solution as a no-brainer. "Everybody in the industry is focused on increasing participation rates and reducing premature leakage," he says, calling ReservePlus "a logical solution to an archaic process."

His company's product does that by administering loans through the use of the now ubiquitous debit card.

"It makes it phenomenally easy to administer the loan from the employer's perspective," says David Godofsky, an attorney with Alston & Bird.

Loan administration can be a burden for employers. Given the number of employers that make loans available, it is a common hassle.

In 2006, the nonpartisan Employee Benefit Research Institute estimated that 85% of participants were in a plan that allowed loans from their 401(k). For businesses with 10,000 participants or more, that figure jumped to 93%, and dwindled to a mere 27% for plans with 10 or fewer participants. At the end of 2006, only 18% of all plan participants (regardless of size) had outstanding loan balances, with little to no variation in participant loan activity by plan size.

The IRS says, if the participant has had no other plan loan in the 12-month period before application, they are allowed to borrow 50% of their vested account balance, or a maximum of $50,000. If the participant had another loan within the 12-month period, they are generally limited to 50% of their account balance, minus the outstanding loan balance or $50,000, minus the outstanding balance in the preceding 12-month period, whichever is less.

Loan repayment is most commonly handled through payroll deduction, which requires complicated amortization schedules. Additionally, if an employee with an outstanding loan is terminated or quits, the loan must be repaid in full within 90 days to ensure payment without default.

Young doesn't fear any legal issues. "Our program is completely compliant with the rules [for loans from] qualified plans," he says.

The company's debit card program makes payment portable by outsourcing administration and eliminating payroll deduction, saving employers the double whammy of saying "you're fired," and "by the way, you also owe a check for $10,000 in the next 90 days" in the same breath.

Participants can also repay the loan at a faster rate if they so choose.

Barry Kublin, a TPA and president of BPA-Harbridge who has made ReservePlus available to over 150,000 participants in 1,400 plans for over two years, says loan repayment is 110% percent faster than traditionalmethods. He estimates that his company's use of ReservePlus loans has been in the thousands.

Additionally, plan sponsors no longer have the hassle of dealing with an amortization schedule, and incur no annual fee for the program - ReservePlus generates income by keeping a percentage of the interest on loan repayments from participants.

Another difference between traditional repayment and a debit program involves how the money is removed. With traditional loans the entire loan amount is liquidated upon approval, meaning the plan participant loses interest accruals on the amount of the loan.

With the debit card program, the entire loan amount is merely moved to a money market or other stable account and funds are made available per purchase, with interest generated from the principal loan amount being returned to the remaining 401(k) balance.

Once approved, participants can also increase their credit line to an employer-determined amount through a simple online process - reducing the need to take out a potentially larger loan amount than necessary. On average, Young says, ReservePlus participants borrow 35% less over time.

"I'm not disagreeing that this may be inappropriate for certain groups of employees, but if you're going to have a loan, I'm assuming it's because your employees want one," says Kublin. "The people [resisting this kind of program] are fighting the tide of technology."

Kyle Brown, retirement council for Watson Wyatt, sees the issue as one about early adopters.

"Employers have to consider what's my appetite for being cutting edge,'" he says. "Do you want to wait ... [and] let some others blaze the trail?"

He sees positives and negatives to the loan process. "This is a tool," Brown says. "Just like a hammer can be used to build a house or smash your finger, you really have to trust folks that they're using this hammer' to build their retirement savings, not to smash it."

Godofsky notes that borrowing form oneself may prove a prudent financial decision in some cases as bank or credit card interest charges can be avoided.

If a plan already allows loans, there might not be any restriction on what a person can buy with the funds. All are fair game, although the most common expenses involve medical bills, college tuition, and funds to purchase a home.

Still, some industry experts remain both skeptical and critical.

"Most 401(k) people would say are you kidding?' to this kind of plan," says Bill McClain, a principal in the defined contribution practice at Mercer.

"There's a danger in employees getting the wrong idea and misusing this approach," he says.

Editor's Note: Has our coverage of retirement plan debit cards got you thinking? Share your thoughts and comments online at ebn.benefitnews.com. Click on forums to join the idea exchange. Also, feel free to email the author directly at mclean.robbins@sourcemedia.com.