Learn This HR Lesson: Stay Away From Your 401(k)


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.

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