A Debit Card for Your 401k? You Gotta Be Kidding Me

Believe it or not, some employers are making available a product that provides employees with a debit card that accesses the employee’s 401k plan. On Street.com, Simone Baribeau says it all in one sentence:

Borrowing against your nest egg is becoming as easy as stopping at an ATM.

In a word, no. In fact, no, no, No, No, NO!

Borrowing against your retirement just shouldn’t be as easy as going to the ATM. Or buying a cup of (admittedly overpriced) coffee at Starbucks. It should take time, and trouble. It should require forethought and planning.

Critics contend use of the cards risks depleting already skimpy retirement savings. “Big picture: it just takes us out of the context of a 401(k) loan being a loan of last resort,” says Jean Setzfand AARP’s Director of Financial Security. “Seeing what we see, [with retirement savings] not quite where we want to see it, we’re just afraid that this is going to deplete it further.”

I am sure employers love the convenience of having someone else handle the administration of 401k loans. And of having the employees bear the expense of that administration. It’s a great deal for them. Proponents say it encourages participation in 401k plans by younger people, who don’t want their retirement savings tied up. And that it gives people a sense of control. Well, I’ve got news. Retirement savings in a 401k plan is supposed to be for retirement. That implies tying it up, for a long time. That’s what it’s for. I can control how it’s invested. If I’m spending it with a debit card, I’m not in control of it; it’s gone. Spent. Outta here. And, I’m paying someone else for the privilege.

Traditional 401k loans give employees access to the funds when they need it for a true emergency. The time and trouble that it takes to access the account is a good thing–it forces you to be thoughtful and plan ahead. The whole problem with the concept of a debit card is that it doesn’t require thoughtfulness and planning. It encourages impulsiveness.

Proponents also cite the ability to repay a 401k loan long-term even if your employment ends. Traditional 401k loans must be repaid within 60 days of termination of employment or they become distributions. There may be those for whom that makes sense–whose work is seasonal, for example, or who work on a project-by-project basis. But if your employment isn’t stable and you just get laid off a lot, that doesn’t really help. You’re not going to have the money to pay back the loan anyway.

For most people, it’s just a bad idea. Iif you have one of these debit cards, I suggest locking it away somewhere. Like in a safe deposit box. In another city. And give your mother the key. When you want to borrow from your 401k, ask yourself whether it’s worth postponing your retirement to have those funds today.