Your 401(k) Isn't an ATM

Need some cash? Why not tap your retirement plan?

That's the concept behind a program called ReservePlus, which allows 401(k) plan participants to take out loans against their retirement accounts simply by using a debit card. Employees apply for a line of credit against their 401(k) balances, which they can draw upon through ATM withdrawals or purchases with their debit cards.

Making loans simpler
On the face of it, the program is a win-win for employers and employees alike. With most 401(k) plans, you can only get loans by applying directly with your employer. Although the loan process isn't as complicated as what you'd go through to get a mortgage loan, employers sometimes have rules that make it cumbersome to borrow from your retirement accounts. Also, most plans require you to borrow a fixed amount. Since you have to pay a setup fee that typically runs as much as $100, along with annual administrative fees, every time you take out a loan, getting multiple loans can get expensive in a hurry.

In contrast, the ReservePlus loan is more flexible. Once you apply, you essentially establish a credit limit, but you get to choose when you actually want to borrow money. Moreover, your employer doesn't have to get more paperwork from you every time you want to borrow -- the one-time application takes care of that for employers. And if your plan allows it, you may even be able to keep your ReservePlus loan if you quit your job -- a feature that many employer plans don't offer.

The wrong attitude?
Proponents of ReservePlus say that this flexibility encourages workers to participate in retirement plans. Whereas cash-poor younger employees may be reluctant to lock up what little spare cash they have in a retirement account for 30 or 40 years, ReservePlus lets them get easy access to their money if they need it in the interim.

Yet the program doesn't come without costs. You'll still have to pay your employer to set up the plan, and you'll also pay charges each time you take an advance.

More importantly, though, when you apply for a loan, the entire amount of credit you're given gets put into a money market fund. That happens regardless of how much you're actually borrowing. So if you have a $10,000 loan limit but only borrow $1,000, the full $10,000 gets put into the money market fund.

That will cost you in the long run. Giving up the returns available in stocks is too big a sacrifice to make -- especially for younger workers. Consider some of the stocks you'll typically see in stock mutual fund and ETF choices within 401(k) plans:

In contrast, Vanguard's Treasury Money Market Fund has returned just over 5% annually since it opened in 1983. Currently, it yields less than 4%. Even if you just got the average return for domestic stocks of 10%, the 5% you're giving up in annual return will cost you nearly 80% of what you would've made from stocks since then.

To add insult to injury, the particular money market fund you'll have to use -- which happens to be managed by the same company that runs ReservePlus -- has an expense ratio of more than 1%. That's well above what a typical money market fund charges. Added together, even with the benefits, the costs of the ReservePlus program -- and 401(k) loans in general -- are just too high.

Stay focused
Saving for retirement does require a commitment. Although it's hard to sacrifice in order to save, especially when you're young, the payoff is too great to pass up. Programs that encourage 401(k) loans distract employees from the real purpose behind participating in their retirement plans: setting money aside for a successful future.

For more on how to retire in style, read about:

• What it takes to get ready to retire;
• Some simple steps to help you invest smarter;
• Whether your retirement portfolio is safe.