The issues that occur to me:
1) How would the 401k funds would have been invested if you didn't try the arbitrage? There is a potential opportunity cost between the interest you pay yourself, vs. your normal 401k allocation, vs. the "low risk" investment vehicle you put it into outside. If you have really sucky 401k investment options, the move may be understandable.
2) 401k loans often involve extra fees- on mine it's a 70-$80 "service fee" if I remember correctly- regardless of how much or how little I took out. This would eat into your profits from "outside."
3) If you lose your job or choose to leave it, your 401k loan is due, in full, in very short order- and if you can't pay up you get charged income taxes and early withdrawal penalty.
4) Related to 3), if your investment "outside" declines, you may have to pay back that 401k loan in full with depreciated assets.
5) Depending on your investment vehicle outside, you could be subject to taxes on your profits.
6) I am not a lawyer, but I spent way too much time in the insurance world- retirement funds in retirement-type accounts are usually sheltered from lawsuits (to some extent). You may want to check on how funds in hand from a 401k loan would be treated in that scenario.
7) Also, many 401k administrators limit how much of your current balance you can take out on loan.
This is just what comes to mind as I eat my lunch....