A 401(k) debit card?! It's not so bad

The program does waive the usual $100-to-$200 setup fees for loans as well as any monthly fees. That, plus the fact that people tend to borrow less, means the costs are a wash, Young said.

All this said, chances are pretty good this is just academic for you, as ReservePlus hasn't exactly taken the 401(k) world by storm. Although it's been around since 2003, the program counts only "several thousand" users. There are 52 million active participants in 401(k) plans today.

The program could entice some small businesses that don't have 401(k) loan features to add them, because ReservePlus handles all the administration. (Although 93% of big-company plans offer loans, according to the Employee Benefit Research Institute, only 27% of small-company plans do.) That would obviously be a good thing if it encouraged people to participate and a bad thing if they borrowed against their retirements to buy stupid stuff.

4 questions before you borrow

Whether or not your employer dangles a 401(k) debit card in front of you, you should keep in mind the following when considering a retirement plan loan:

Have a darn good reason for tapping your funds. Retirement money generally should be left alone for retirement. It's far better to have the market earning 8% to 9% returns for you than to have to shell that money out of your own pocket. You shouldn't be using this money for plasma TVs, vacations, clothes or other such spending.

Consider the risks. The biggest one is that you may lose your job, be unable to pay back the money and wind up with an inadvertent withdrawal. Another significant risk is that you'll cut back on your 401(k) contributions so you can afford to repay the loan, and that can devastate your future returns. You should at least continue contributing enough to get your company's full match.

Don't use a 401(k) loan to paper over a spending problem. Borrowing against your retirement can be a red flag that you're living beyond your means. If that's the case, and you don't stop overspending, you'll eventually just wind up deeper in debt.

Beware of using retirement money to pay credit card and other unsecured debt, including big medical bills. If you're drowning in debt, you might be able to get a fresh start through bankruptcy. If you "secure" the debt by using a 401(k) loan -- or a home-equity loan, for that matter -- you're stuck with it. (By the way, bankruptcy shouldn't be your first choice, but sometimes it's the best of bad options. Check out MSN Money's Bankruptcy Guide for details.)

Liz Pulliam Weston's new book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published Feb. 11, 2008

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