Retirement self-sabotageBlog added by Andy Stonehouse on January 16, 2013
Andy Stonehouse

Andy Stonehouse

Joined: October 13, 2011

We have met the enemy, and he is us.

Always one of my favorite old-time comic strip lines (Wikipedia that one for a nice diversion this morning). But also painfully true when considering the great undoing of America's continually evolving retirement experiment.

As profiled recently in the Washington Post, one of the biggest threats to participants' retirement plan success turns out to be those participants themselves, in the form of 401(k) loans.

Long story short: The still-delicate U.S. economy - combined with our collective lack of financial hygiene, to put it nicely - has seen more participants taking loans of their own 401(k) investments than ever before.

I hadn't even contemplated the reality of such a move until my own employer migrated plan administrators and the option of a 401(k) loan first materialized - and was also the first topic of discussion with our new advisor.

As a source of emergency funds and a last resort, it's a nice option to have, admittedly. But like the whole payday loan crisis - not to mention America's love-hate relationship with credit cards - it's a dangerous proposition.

And with more and more participants finding themselves in financially tough waters, the loans are building to an epidemic level.

What's more, any miniscule hope of creating even the tiniest of retirement nest eggs suddenly goes upside-down like an underwater mortgage - making the chances of even paying it back a challenging prospect, not to mention getting the 401(k) back on a growing track.

What advice can you offer to your participants - or to plan sponsors who may be fielding questions from employees looking for a loan option?

Like any financial wisdom, letting them know the dangers of short-term benefit with long-term damage seems paramount. Yes, it's an attractive and sometimes absolutely necessary route to take when larger financial problems or health-related bills suddenly materialize, but you need to let them know that it should absolutely be the last option.

You also need to be perfectly clear on the tax implications and, most importantly, the counterproductive nature of the loan itself. It may be the best support you can provide.

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