A Third Option in the Struggle Between Credit Cards and 401(k)s

Last month we discussed the perfect storm of student loan payments and credit card debt. In summary, we said that recent rulings requiring repayment of student loans to resume would have a negative affect on retirement saving. But, when coupled with the overuse of credit cards to offset inflation pressures on prices, many employees may be facing the perfect storm when it comes to retirement saving. “The impact of inflation on employees’ ability to pay for household essentials (noted by an increase in credit card payments without an ability to make payments) and the return of student loan payments may combine to be a perfect storm on retirement saving. Impacts could include more hardship withdrawals or even as severe as wanting to cash in their retirement savings entirely.”^[1]
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Credit card debt competes with saving, for retirement or emergencies, on the spreadsheet cells of your employees’ budget. This war of intentions is particularly noticeable in younger generations, like GenZ, those just entering the workforce. As we’ve reported in the past, the average credit balance among members during the period of October to December 2022 was $6,469, with an average monthly payment of $181.^[2] Overall, GenZ has an average total debt of $16,283 when including other forms of debt, like student loans or car payments. According to investment research firm Morningstar, every dollar in student loan debt reduces an employee’s overall retirement savings by 35 cents.
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Paying down credit cards and saving for emergencies are usually the first two priorities towards becoming financially healthy and stable. Some employees may not recognize that credit cards compound interest just as retirement accounts do, only at annual percentage rates much higher than investment rates.  Yet, the struggle to save is more than education or intention. As far back as 2019, we have been noting how hard it is for employees to save. “Nearly half of those surveyed in a recent Pew Research Center poll said their wages aren’t keeping up with the rising cost of living.”^[3]
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However, rising credit card debt may be a sign that some of the basics are missing. Reliance on credit cards may be due to a failure to budget. In a recent survey more than one-third of respondents said they failed to use a budget. Even those who do use a budget may be using it improperly. Many smart employees think that so long as all the expenses are covered each month, their budgets are bulletproof. That brand of planning puts too much emphasis on optimism and fails to leave room for emergencies.
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Is there a solution to saving for emergencies, retirement planning and a need for using credit cards to fill in the holes left in a budget due to inflation? One expert reconsidered an option that flopped in 2012: the 401(k)-credit card. This was originally proposed by Franco Modigliani, the MIT economics professor, and Nobel Laureate not to be confused with Amedeo Modigliani, an impressionist painter though both men were acclaimed for their work with figures. When proposed just a decade and a half after 401(k)s were introduced, the 401(k)-credit card would have allowed employees to access $10,000 or less of their account balances. This concept was brought back in 2012 with a VISA-related product. It met with little success and adoption.
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However, now may be the time to bring back this option thanks to changes in the SECURE 2.0 Act which streamline and incentivize enrolling employees in emergency savings accounts tied to their retirement savings. This approach may remove the either/or saving that employees feel is the only option to resolve the competition between saving for retirement, having a credit card for emergencies, and not incurring additional debt. Some think this might remove the need to turn to payday lenders.^[4]  

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^[1] https://www.bcgbenefits.com/blog/student-loans-and-credit-card-debt

^[2] https://www.creditkarma.com/insights/i/state-of-debt-and-credit-report

^[3] https://www.bcgbenefits.com/blog/competing-priorities

^[4] https://crr.bc.edu/credit-cards-linked-to-401ks-may-be-best-way-to-provide-emergency-savings

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‍These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.