22 January 2008 3 Comments Print This Post  Email This Post

I’m self-employed and therefore rely on IRAs and the like for planning my retirement. But I have stacks of friends and relatives with 401(k) plans — to the point that 401(k)s are a big discussion topic over Thanksgiving dinner. I know plenty of those friends and relatives have played fast and loose with their plans, too. I’ve seen major 401(k) withdrawals for house down payments, covering medical emergencies and a whole slew of other reasons.

It worries me, too. For many of these people, their 401(k) plan is the entirety of their retirement plan. There is no Plan B beyond Social Security. Which is why I was aghast to find out that many 401(k) plan providers are now offering 401(k) debit cards. That’s right — you can swipe plastic with your retirement funds! These debit cards are used with 401(k) loans. Employees then receive bills for loan payments, just like they would with a credit card.

It’s just a loan, right? So what am I so worked up about? Well, taking out a 401(k) loan effectively loses you money. You’re no longer receiving that compounding interest you were counting on for your retirement. And if you take out one loan on your retirement savings, the odds are that you’ll do it multiple times.

There are other worries, as well. If you don’t pay back such a loan in a timely fashion, you can wind up owing far more than just the balance of the loan and the interest. You can face tax issues, along with a penalty for an early withdrawal from your 401(k). Standard 401(k) loans are structured with minimal protection for this scenario: as long as you are employed by the same company offering your 401(k) plan, your payments are automatically deducted from your paycheck before you even see it. Theoretically, it should be hard to default as long as you stay employed.

With these new debit cards, though, there’s not even that small measure of protection. An individual using one of these cards receives a monthly bill — making it easy to default, especially if a person was already in a tough enough situation to need the loan beforehand.

It’s almost as if 401(k) providers are trying to make it as easy as possible for workers to screw up their retirements. In my opinion, your 401(k) and other retirement accounts should be the lender of last resort. In most cases, even borrowing against your home seems like a better idea. The problems that these 401(k) debit cards can cause have the potential to turn into retirement nightmares very quickly.

Thumbnail image by Roger Smith