A loan can be taken from your 401K for any purpose: a home loan, medical expenses, or to buy a 103 inch plasma tv! (I wouldn’t recommend taking out a loan to buy stuff though!) These loans are usually taken out as a lump payment for a specific purpose, but what if accessing the funds in your 401K was as easy as swiping a card? Now it is.

ReservePlus is a new program that has been created by The Reserve, the company that introduced the money market fund (that cool instrument that allows you to get such 4%+ interest rates at banks rather than a nominal .25% or nothing).

The program works as follows:
1. You have a 401K account at XYZ company
2. XYZ company signs up as a participant with ReservePlus
3. Employees can now transfer funds to a loan line held by ReservePlus
4. You use a debit card to make withdrawals, purchases etc and repay your loan in the same way you would make credit card payments

The primary advantage of a ReservePlus account is that you are not required to immediately repay any retirement account loans in the case of job loss etc, you are given more leeway with your loan repayments and you also have the ability to quickly access funds should the need arise.

While the potential advantages of a 401K debit card are great, there is also a horrible downside. The current dynamic of accessing 401K funds has now changed from one where you previously had to fill out papers, make phone calls, and allow for your request to be processed, approved, and for a check to be sent to you for your loan to take place. Now, it is possible to get a card and readily use your card for any purchase you could make with a credit card. When you make funds more readily available for consumption, many people are more likely to use the funds for impulse buys, non-emergency cash, or other purchases that may not be in their long term self interest.

Taking out a 401K loan is a pretty serious move and is something that I would prefer to avoid in all cases. For younger generations that are not going to receive enough government benefits to cover basic living costs such as rent, food, and medication, retirement accounts will be the primary source of living expenses. To encourage the creation of programs that promote quick access to funds that should remain invested in tax advantaged accounts is in the disinterest of the future well being of Americans.

Not only does ReservePlus charge a 2.9% higher rate of interest on their loans and charge initial account setup fees, they are also set to offer automatic withholding from one’s paycheck so that loan repayment funds aren’t even seen except on your pay stub. By promoting programs that decrease the cash flow, disposable income, and overall available funds of individuals who by and large do not realize the repercussions of their actions due either to lack of research, available information, or their misguidance by ‘informed individuals,’ we ally ourselves with increased risk and unsure futures while we should be promoting an environment or security and debt adversity.

I’m certainly not an advocate or keeping people from accessing money that they have saved but when it comes to dealing with your retirement account, it is an account for the future and a potential source of financing in the case of a home purchase and medical emergencies; a 401K is not and should never be treated like an open line of credit, a checking account, or an account whose funds you can readily access with a card that you carry in your wallet for use at a moment’s notice.

Barry Kublin, president of BPA-Harbridge, summed it up very well: “It’s a young technology, and clearly requires education to address misconceptions,” says Kublin. “Do we deny the overwhelming percentage of 401(k) participants a portable convenient loan product that is responsive to their needs because of the irresponsible few?” While I fully agree that everyone should have access to the best programs out there, I have to question whether or not a program that seems to promote quick access to money that shouldn’t be readily accessed on a regular basis until retirement is the best program in existence.

Do your own research and if you are already seeking a 401K loan for a ‘qualified’ reason, ReservePlus might be the right program offer out there. My recommendation is to avoid any program that facilitates quick access towards your retirement funds unless you are actually in retirement.

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Sources:
Benefitnews.com: The cost of an easy 401(k) loan? Priceless - Firm introduces 401(k) debit card
Thestreet.com : Just Put It on My 401(k) Debit Card