Employees can now save in a 401(k) by using a credit card

Spending and saving are kind of like oil and water — they don’t mix well together. But one company is trying to link credit-card spending to increased retirement savings, and financial advisers are taking notice.

Earlier this year, EvoShare Inc. began offering “cash back” to 401(k) and 403(b) plan participants tied to their credit-card purchases at certain merchants. The offer is similar to other credit-card perks, such as points that buyers can accumulate for discounts at retailers like Amazon. The cash back is returned to employees in the form of retirement savings.

Chad Larsen, president and chief executive of advisory firm MRP, said EvoShare has the potential to make a positive impact. He’s considering implementing it in MRP’s retirement plan and potentially rolling it out to 401(k) clients if it works well.

“We don’t often hear of new ideas,” Mr. Larsen said of the retirement plan industry. “So that aspect of this, and the fact that somebody’s put together the technology to do it and they’re building it out, I like that innovation.”

Here’s the basic concept: When 401(k) participants use a credit card to make purchases with participating retailers, the retailers offer cash back, often in the range of 4% to 10% of the total purchase. Every quarter, EvoShare sends the employee a check for the total cash back or transfers the funds electronically. At the same time, a one-time payment for that amount is taken from the employee’s pay check and deposited in the 401(k) plan, so the employee comes out even in terms of take-home pay.

There are currently more than 10,000 online and local merchants that offer cash back. Some of the well-known vendors include the likes of Walmart, Target, eBay, Expedia and Groupon. EvoShare keeps a small piece of the commission negotiated with vendors.

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Retirement plan advisers like Vincent Morris, who’s an investor in EvoShare, believe there’s a benefit in boosting retirement savings through the typical purchases Americans would be making in any case. Mr. Morris, president of Resources Investment Advisors Inc., is in the process of rolling out the service to his clients.

Credit card spending has been on the rise recently. Americans had $91.8 billion in new credit card debt at the end of 2017, the largest annual total in a decade, according to a Wallet Hub credit card study. Average household credit card debt has also increased, to more than $8,300 in the second quarter from roughly $6,600 at the beginning of 2011, according to the study.

Each time participants make a purchase, they get an email with a forward projection of how their cash back — say, $5 from one purchase — will grow up to the point of retirement. David Stofer, president of Mariner Retirement Advisors and also an EvoShare investor, sees this as the most important benefit since it reinforces that a small amount of money can grow substantially over time.

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But not all advisers are on board. Aaron Pottichen, senior vice president of retirement services at Alliant Retirement Consulting, introduced the platform to some plan sponsors but said they didn’t embrace the concept for administrative reasons.

EvoShare sends a file to employers once a quarter listing the amount of money to be pulled from each employee’s paycheck and deposited in the 401(k). The contribution takes the form of a “one-time special election.”

“I love the concept, but I think it was hard for the plan sponsors to execute on,” Mr. Pottichen said. “It’s one more thing for them to do, and the hassle of going through that process was not worth the benefit.”

Related Topics: 401(k) plans