401(k) Loans with an ATM Card
Under some 401(k) savings plans, a plan participant can get loans simply by going to any ATM and entering a PIN. One could get $50 or $100 out and because it’s a loan, there aren’t any early withdrawal penalties. There are some pretty steep fees, though, for loan origination, ATM fees, the like. And instead of paying the loan back by payroll deduction (used to force the employee to pay the loan back), the employee gets what looks like a credit card statement in the mail.
I know all the arguments about it being easier for Human Resource departments (I am an employee benefits specialist), reducing the administrative burden. As I said, I’m in the employee benefits field and I don’t have any sympathy for reducing the paperwork the HR/Benefits Department does. It’s a paperwork-intensive job. I know it makes it easier for employees to get money from their accounts. That’s exactly why it’s a terrible idea.
Americans have viewed their long-term investments — their houses, now their retirement plans — as ATMs for a long time. This ATM card linked to a 401(k) loan just makes it easier for people to tap into their retirement plans to continue with the consumerist urges. The conventional — and correct — wisdom is that you never take a loan from a 401(k) unless you’re in such dire financial straits (like you’re about to lose your house) that you absolutely have to. You don’t take a loan to finance a down payment on a house. And you certainly don’t take a loan so that you can by that big-screen television and the Xbox 360 that you just have to have. The ATM card linked to the 401(k) account makes it too easy to do just that.
This is money for the future. What if the employee blows through the 401(k) and there is no Social Security when that person comes to retire, or becomes too ill to work? (Employers — by and large — do not fund traditional pensions anymore. If they do contribute at all, it’s with matching funds into the 401(k) account.) Does Congress step in and bail those people out? There should be hardship testing for any 401(k) loan. It should be as difficult as possible for someone to get a loan from his/her 401(k), if only to save that person from him or herself. Congress should outlaw these instruments before they have to bail out the shortsighted.
That is ridiculous! This will create ANOTHER crisis — seniors with income. What are the powers that be thinking???
I don’t know what they’re thinking. There are a lot of things in my field that I think Congress gets wrong (Dependent Care account max $5000/year is another). I think it’s just not a priority, honestly, which is short sighted.
This is a frightening thought.
Could you imagine having such easy access to the 401(k) back in the 1990’s? I could have borrowed against it to maybe invest in a dot com figuring I’ll more than make up for any fees and penalties. The same is true with the real estate bubble and now the banking industry – not to mention that wall that is begging for the big screen TV.
I might as well borrow some of my retirement money and go to the casino.
ATM’s also take the embarrassment of having to deal with the benefits specialist out of the equation. It is a very difficult decision to make and I agree – it should be.
It’s crazy, isn’t it? Just as crazy as privatizing Social Security.