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.