A decade ago, when Americans took part in investor knowledge surveys, most people did not even know what stocks or bonds were, recalls Barbara Roper, director of investor protection at the Washington, D.C.-based Consumer Federation of America. But the one thing that just about everyone knew for sure, she says, was that they could borrow against their 401(k) plans.
Now, the advent of 401(k) debit cards, which allow people to withdraw from their 401(k) plans the way they would from say, a home equity line of credit, has made it all that much easier for people to access their retirement savings–something that Roper believes is dangerous for the future of retirement finance in America. “I understand that to a limited extent, assuring investors or employees that there is some way that they can access their 401(k) plans in an emergency is important,” Roper says. “Making that too easy, though, is a mistake. We should not consider our 401(k) plans as emergency funds or general purpose savings accounts to turn to any time we want money.”
When the global financial system is being pulled through the wringer and the future of the American economy looks, to say the least, bleak, experts like Tom Foster, national retirement expert for Connecticut-based insurance giant The Hartford, acknowledges that it’s fairly easy to understand the thought process behind 401(k) debit cards. This is, after all, a time when consumers are being hit hard from all sides by a host of factors including high energy prices and a mortgage crisis. Many Americans are also losing their jobs, so it’s natural that consumers would want access to as many funds as they can get and as quickly as possible, and some companies would look to offer them this option.
Yet Foster cautions that withdrawing from a 401(k) plan with a debit card is nothing but a quick-fix solution for long-term, more lasting problems. “One of the main facets of a 401(k) plan is letting the money sit and work over time,” Foster says. “When you take money out of your 401(k) plan, you have to pay it back and if you don’t pay it back, you put yourself into an adverse tax situation.”