401(k) Debit Cards – How Do They Work and Are They a Good Idea

Last year we discussed the reasons to take or avoid taking a 401(k) participant loan in Should I Borrow From My 401(k) Plan?. We also discussed the development of a 401(k) Debit Card/Line of Credit. Just Put It on My 401(k) Debit Card provides more details on how a 401(k) debit card would work:

“The loan begins only after the money is removed from the account. Instead of a payroll deduction, participants are billed directly, and then pay back the loan through the same mechanisms used to repay a credit card. Depending on the employer, some may also qualify for a revolving loan -- taking out and paying back money as they need it.”

Is the 401(k) debit card a good idea? The 401k Debit Card: Probably One of the Worst Ideas Ever identifies the “So-Called Benefits”, including why it is a stretch to refer to them as benefits, and the “Obvious Drawbacks” of a 401(k) debit card:

"The So-Called Benefits"

• Provides more flexibility, encouraging participants to increase participation.
• Eases the administrative burden on the human resources department.
• Provides more flexibility for loan repayment

"The Obvious Drawbacks"

• Provides more access and quicker access to retirement funds, making it easier to make impulse spending decisions.
• Provides a method of repayment, which is billing separate from payroll deductions, that makes it less likely that participants are going to have the money and/or discipline to make monthly payments.