Stop! 5 Reasons Not to Touch that 401k

(MoneyWatch)  This is an HR column, not a financial one, but Fidelity is reporting that 22% of their 401k clients have taken a loan against their 401k accounts. Stop and think about that. 22% of Fidelity clients. These are people with jobs who are taking out loans -- not people who are unemployed looking for more cash.

My previous boss always told us that we could get in legal trouble if we gave employees financial advice. She was a lawyer, so I presume this is correct. But, for me, it was a moot point anyway. There was no way I wanted to tell an employee how much money to put into a 401k, how to allocate that money, or upon retirement, whether they should take a lump sum pension or go for the annuity. My answer was always the same, "I can't give you advice in that area. I suggest you call your financial adviser."

But right now, I'm going to give you all some financial advice I've gleaned from years of taking phone calls from distraught people. Do not take a loan from your 401k. Just don't. Your co-workers probably are, but I want to prevent you from making that tearful phone call to HR in the near future.

I realize the appeal of the 401k Loan. It's "your" money, after all, and the interest you pay on it is paid to you. You don't have to go through a credit check for the money either. You want it? It's yours. But here are 5 reasons why it's a bad idea"

1. 401k loans are called when you leave your job. It doesn't matter if you are fired, laid off, get sick and have to leave, have a baby and want to stay home with it, found a new dream job, or want to join the Peace Corp. When you are no longer employed by that company, your 401k loan is due shortly thereafter. If you can't pay up, you have to pay taxes and penalties on the loan amount. And if you can pay up, what are you doing taking the loan in the first place?
2. Your job is not secure. Yes, I know you think that your job is secure. I've laid off thousands of people who once thought their jobs were secure, too. Your company could hit a rough patch, take a new direction, get bought out, or just decide they don't like you. Trust me on this one. Your job is not secure. And all the HR lady (even a nice one) can do is offer sympathy. We can't change the rules that make the 401k loan due upon termination.
3. You can't change jobs. With a 401k loan hanging over your head you are trapped in your current company. If a headhunter calls up and your dream job appears, do you really want to be trapped by the $10,000 loan you took out?
4. If you don't have the money now, what makes you think you'll have extra to repay the 401k later? Save up for what you want first, rather than making payments on what you've bought. If you can't save the money now, you won't be able to make the payments either. This will add stress to your life, and you don't need this.
5. It ruins your dollar cost averaging. Okay, that's financial speak not normally uttered by HR people such as myself. But, essentially, taking a little bit of money out now can cause big differences in the long run. Joshua Kennon explains more about dollar cost averaging at About Investing for Beginners.

If you've evaluated all your options and still think this is the best idea, feel free -- but make sure you think through the 5 things I've listed. Don't get surprised by the bad things that can come along with a 401k loan.

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