401(k) Linked Debit Cards Are A Mistake

A recent Yahoo! Finance article discusses an option some companies offer in which you can get a debit card linked to your 401(k) account. With a simple swipe of the card, you can borrow money from your 401(k). Without going into details of how it works, the mere fact that you can have such easy access to something you shouldn’t be accessing in the first place is a huge mistake in my opinion. Your retirement is something you should enjoy when you retire and you put your future in significant jeopardy when you do something as risky as borrowing from your retirement account.

Mechanically, you establish a ReservePlus account and request a certain amount to be funded to that account. You are issued a ReservePlus card that debits from that account. With a regular 401(k) loan, payments are deducted from your paycheck but in this case the payments are made outside payroll. You would get a bill just like a credit card.

So, what are the good parts of this program? Reserve Solutions says that users generally use 35% less than what they applied for which sounds great in theory. It sounds like users ask for more than they really need and by using the card they end up not actually borrowing, and paying interest on, 35% of the balance they moved in. The only error I see with that logic is that the type of person requesting a loan for something like a house isn’t going to be using that same debit card system for something like groceries.

There are additional advantages and disadvantages for employees and employers that the article goes into so I invite you to read it if you’re curious for more information. Overall I think giving people such easy access to funds is a mistake, it implicitly encourages people to debit from their retirement account (even though they will repay).