With the ReservePlus 401k debit card, people can simply carry their 401k contributions in their wallet or purse and swipe it whenever they want to make a purchase and have instant access to that money.
This is dangerous on so many levels. First, the time that it took to apply for a traditional loan gives people time to think twice about their decision.
If they know that they it may take a week or more to get the funds, they are not as likely to take the loan for instant gratification purposes.
With that money at their fingertips, it is easy to simply tell yourself that you’ll just use that 401k contributions money now and pay it back right away when the bill comes.
This is the same trap people fall into with 401k credit card spending problems where they want to make the purchase right now, and while maybe having good intentions of paying it off right away, find themselves dragging the payments out for months or years.
The second major drawback comes from the way repayment is handled–direct monthly statements to the employee.
While Reserve Plus cites this as a benefit, I have to disagree. If someone needs to borrow from their retirement plan in the first place, it is probably because they don’t have the money available elsewhere.
If that is the case, is it really likely that they are are going to have the money and discipline to continue making the monthly payments?
At least with a traditional loan the payments are withheld through payroll, so they have no choice but to make the payments.
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