The Hofmann-Klemen effect describes the observed reduction in expandable character and cation exchange capacity of lithium-saturated montmorillonite upon mild heating. Although it is widely accepted that the observed changes are due to the lithium ions becoming fixated within the layer structure of the clay mineral, some uncertainty still exists as to the precise location of the migrated lithium ions within the clay framework. It has been suggested that the cations reside in the ditrigonal cavities of the tetrahedral layer, the vacant octahedral sites, or both. We employ density functional methods to examine the phenomenon at the electronic structure level. We find that it is energetically preferable for lithium cations to reside in the vacant octahedral sites as opposed to the ditrigonal cavities due to the closer proximity to the negative charge sites in the octahedral layer increasing favorable Coulombic interactions. Occupation of octahedral sites causes structural hydroxyl groups to reorientate perpendicular to the ab plane. Deprotonation and dehydroxylation are not observed during molecular dynamics at experimentally reported temperatures. Dehydroxylation inhibits rather than facilitates cation migration. A comparison of calculated power spectra with experimental infrared spectra suggests that lithium cations do not migrate to ditrigonal cavities when no tetrahedral aluminum is present.