I rarely write about math or compensation because neither are my strong suit; however, I’m here to testify to the dangers of tapping into your 401(k), your pension plan, and other retirement investments.
A former employer of mine allowed employees to borrow money from their 401(k)s and repay the loans through payroll deductions; however, my employer was also engaged in a massive restructuring effort. Many employees lost their jobs.
As the on-site HR Generalist, I was exposed to the unfortunate financial illiteracy in my otherwise educated workforce. When accepting the terms & conditions of the 401(k) loans, far too many employees ignored the important fine print: they were required to repay the 401(k) loan in full within 90 days of their termination date or the loan would be treated like a cash withdrawal (where they would face an early termination penalty and taxes).
As the on-site HR Generalist, I was expressly forbidden from counseling employees on financial decisions (it was a policy and not just because I’m bad at math). I was only allowed to offer comfort and advise our employees to talk to the benefits department or speak with our employee assistance program. It was heartbreaking to hear the panicked voices of my colleagues because I knew that their hard work & financial planning was placed at risk by a decision to borrow against their retirement savings
(This is why people hate HR, by the way. We’re not staffed with experts, nor are we empowered to speak or think like an expert. We are nothing more than an inefficient referral system.)
SHRM says that one in four employees will make an early withdrawal from their retirement savings. The reasons for the early withdrawals were never simple, and I wish that my HR department could have offered more proactive guidance to these employees. SHRM suggests that HR managers have a role in educating employees on why loans against retirement savings should be considered as a last resort; however, much of HR is now outsourced and specialized, thus requiring employees to make financial decisions through the anonymity of the internet — or a call center in Bangalore.
Had I been able to provide proactive advice, it would have gone something like this:
- Don’t take a loan against your 401(k).
- Don’t do it.
- Just don’t.
I’m not naive and I know that life is tough for many people, but there are resources and other unexplored avenues out there. Instead of offering lunch & learn sessions on employee wellness programs, maybe HR leaders ought to work with local management teams to schedule relevant sessions on how to manage an out-of-shape financial portfolio. At the end of a long work day, who cares about high cholesterol if your house is in foreclosure and you’re borrowing money against your 401(k)?
Food for thought.
At my company we offer “family financial fitness” classes; they’re sitting on the intranet and we don’t have to manage them or know who takes them. Our bank already had the classes and we cut out most of the “infomercial” aspects before loading them on our server.
I read some study somewhere about how teaching people how to manage their money has the same effect on job satisfaction as giving an incremental raise. Certainly it shows care and concern for employees. I’ve been AMAZED at how many people have mentioned that they learned something from them.
this is a great post Laurie. I’m experiencing my first bout with new 401(k)ers this summer, and explaining it all to them. I’m also working with a rollover and a lad who did borrow, then resigned. (same sneaky guy as i mentioned last month).
I’ve asked my uppers twice for any advice on handling the enrollment period, reference materials, guidelines, etc. and i just got a few pdf.s in return. not really what i was looking for, so i’ll take this opportunity to go above and beyond for my employees.
Offering financial information to employees is a great idea. My weakness is poor record keeping. Don’t count on your brokerage house to keep track of your cost basis, for example. We worry about getting to the gym to work on our flabby arms, when we should be more focused on tightening our record keeping. That way we know how much money we actually have. Sometimes, it’s not as much as we think.
I totes agree: do not take a 401k loan. I strongly feel it’s a disservice to employees to allow loans on any retirement plan. I mean, you could get a home equity or sometimes even personal loan from a BANK or credit union for less than your retirement plan administrator charges for f’s sake.
What really kills me are the “serial loan” people. They take out a loan, pay it off, and then promptly take out another one. UGH.
I’ve heard that with all of the fees charged by the 401K companies, that you’re actually better off just socking the money away in an interest bearing account somewhere, forgoing the 401K altogether. thoughts?
I totally agree (don’t borrow from 401k). In a world where many of us will lose our jobs to outsourcing, downsizing, spinoffs, company closings, reductions in force … many of us more than once, it’s just too risky to borrow from retirement savings.
It’s too bad your employer would not allow you to warn people about the dangers of borrowing from retirement savings. That’s a shame. (Why were you not allowed to give that excellent “Just don’t do it!” advice?)
@Franny I’m thinking that those classes would be effective for many HR Generalists, too. How many of us are underpaid and have an unbalanced financial portfolio. Physician, heal thyself!
@Gina I’m laughing because you could make a just a little effort and it would be so appreciated by your employees. A little goes a very long way in the world of HR!
@Catherine I agree that record keeping & awareness are really lacking. We assume that, when the time comes, things will work themselves out. That may be true for the silent generation & baby boomers, but it’s not true for anyone born after 1962.
@hrwench Brilliant advice. I have referred friends to Prosper and have loaned friends money off my credit card at 5% interest. Anything to get out of the serial loan cycle. I’ve also had conversations with friends & family that go like this — can you really afford that house? your car? the tuition payment? maybe you ought to make some different choices about consumption, eh? I try not to use my judgmental tone, but it’s tough.
@lovesickbilly I’m not Warren Buffet so I have a traditional 401K and a boring financial portfolio. I don’t know anyone who has retired in luxury off their awesome internet trading skills or an interest-bearing, high-yield savings account — do you?
@dhconcerts Thanks for the note. Our HR team was ‘advised to advise’ and we were asked to provide information & resources. Financial advice or opinions were not fact-based, and thus, out of the realm of HR. (It was a stupid way to run a Human Resources department, yo. Very risk-adverse and based on the input of lawyers!
)
Laurie,
Great post - this from another HR generalist at a company of 75,000+ and growing through acquisitions (while the HR help desk numbers are shrinking? Don’t get it).
Any kind of loan in this uncertain employment climate, especially for a company depending on renewing existing client contracts, is not a good idea.
My experience includes calming sudden ex-employees finding lump sum repayments taken out of their last check for computer loans and other benefits.
As a former journalist, I do give out as much information as I think needed to help the person I’m talking with on the telephone if I’m sure of the information and can back it with documentation. I do believe in treating and informing others the way I’d like to be treated and informed.
This will no doubt get me fired one day and I’ll be able to pursue my dream of blogging fulltime.
-Sam
I don’t particularly know many “regular” people who have retired “in luxury” from a 401K, either. CEOs and VPs aside, of course.
I can’t tell you how many times I was SAVED by my 401K savings.. but the situations were unusual. I agree with Laurie - when you sock it away, it is supposed to be considered gone. Had I not had it, I would have been forced
to make other decisions (Perhaps giving up my kids, hmmmm)
There are always extenuating circumstances…
@maleesha Very good point. I don’t know many people who have retired at all. Most people I know work until their 70s & 80s & then die. True. The best guy I ever worked with in HR told me never to retire — it means certain death. (I thought working in HR meant certain death.)
@colleen211 There are always extenuating circumstances, and it’s your money — so keep your kids and take a loan. I just wish there were better ways to prevent these extenuating circumstances!
@sam You can live your dream of blogging FT and keep your income from your HR job. It’s easy to manage both — I once had a job and blogged anonymously. The blogging kept me sane, yo!
Hey, you finally made it as the featured blog on the WordPress homepage…CONGRATULATIONS!! About time too, cause you’ve always kicked some wordpressin’ ass from the start Laurie!
(now put me back on your blogroll dammit!)
Aw shucks, you were never off the blogroll.
Alright…game on!!
We won’t let people borrow from their 403b. It’s wonderful.
Niiiiiiiiiiice, Rachel. I love rules and I love saying no. It makes life in HR so much easier.