There are many self-directed IRA (and a more limited number of 401K) administrators and custodians who perform admirable jobs in assisting individuals with self-directing their retirement assets. They charge fees for their services that a prospective client should review to truly determine if this is the best avenue for them to take in establishing a self-directed account.
However, many individuals believe that utilizing administrators and custodians are there only options OR they are foolish enough to buy the $195.00 “do it yourself” kit. But, when a prospective “self-directer” is considering self-direction of their IRA or 401K assets into non-traditional asset offerings, there are some issues that they may wish to consider when retaining the services of an administrator or custodian.
And, without further ado, let’s look at some of these considerations:
1) Charges and Fees – Many of these fees charged by administrators and custodians can be classified under the following areas:
A) Account set-up fees;
B) Account maintenance fees; and,
C) Transactional fees.
Bottom line: it is money that you are paying out for a third party (i.e., administrator, custodian) to perform transactions for you. The first question one may want to ask themselves is: do I really need to these services? Consider this…the majority of people who set up self-directed status have three points of interest they want to accomplish in going self-directed:
1) to ensure that their self-directed status is set up in compliance with IRS and Department of Labor regulations;
2) what types of opportunities may be available for them to invest into; and,
3) not wanting to pay people fees for items they could just as easily do themselves or, even worse, paying a third party commissions, fees, etc. even if they lose money!
In many of these cases (not all), clients are actually penalized for GROWING their self-directed retirement account because of additional fees they incur in the process.
2) IRAs vs. 401Ks? – Many people do not realize that they have the option, if they qualify, to select self-directed status with a 401K plan. Many just assume that they can only to an IRA because that is what is offered to them.
Self-employed individuals who have a sponsoring business can, in most cases, qualify for a self-directed 401K. If one qualifies and wants to do select this option, they should be allowed to do so. In cases where an administrator or custodian will set these up, additional fees apply to the individual and that is not their primary function as a business.
As a a reminder, there are some key benefits associated with establishing a self-directed 401K vs. an IRA. First, the contribution levels are higher. Second, if need be, an individual can take a loan out against their 401K but cannot do this with an IRA. Third, if the individual makes a mistake (e.g., prohibited transaction, disqualified individual), there is a bit more lenience if done through the 401K. In many cases where mistakes are made within an IRA, at a minimum the IRS will most likely consider the plan fully distributed and the plan will be subject to tax and penalty for early withdrawal.
3) Restriction on Guidance – An administrator or custodian cannot make comment on, endorse, recommend or otherwise suggest that you make an investment. Nor can an administrator or custodian bring to a client a potential investment opportunity. As a result, a client may feel alienated or not feel like they are working in a collaborative effort with their administrator or custodian. In many cases, there is not an atmosphere of a “win-win” between the client and his/her administrator/custodian.
However, this is not necessarily bad and may be good. As an example, if a client is working with an unscrupulous facilitator who does not have his/her client’s best interests at heart, they may “push” the client into investments that have not had sufficient due diligence performed. This type of relationship could certainly be worse for the client.
4) Assisting Client in Marketing Efforts – Many self-employed individuals in particular are in upstart businesses that can greatly benefit from referrals and marketing assistance. Administrators and custodians cannot assist an individual with their marketing efforts and will not do so.
5) “Specialized Advice” – An administrator/custodian cannot and will not give “specialized advice” regarding an investment opportunity, things to consider, potential benefits and disadvantages to a particular business activity or business. If you have such questions, they will not be willing and cannot work with the client in this regard. They are merely the processor of paperwork.
6) Regulation or Registration? – Here is where administrators and custodians differ. An administrator is not licensed, registered or regulated as a financial institution and, in most cases, is an Limited Liability Company that was formed to serve in the business they are in. However, they are not regulated by any government agency. Should you deposit your assets through an administrator when they are not regulated? A wise question to ask oneself.
In contrast, a custodian is regulated and registered as a financial institution. Again, however, they are serving as a processor and cannot do many of the other aspects that are addressed in this article.
7) Assets of the IRA Client – In many cases, assets held by the IRA through the administrator/custodian are held in the name of the administrator with FBO (for benefit of) status to the client. Is this as bad as it sounds…probably not. However, if an individual had an option not to have THEIR asset held through the administrator, should they consider this option?
8) On-Going Transactional and Maintenance Fees – This has been somewhat addressed in Point #1, however consider some real like practical questions about what you are being charged and what continues to be charged. For example, if an IRA owns a property (asset) within their IRA and their are ongoing fees, etc. that must be paid like maintenance fees, repair fees, taxes, mortgage payments, etc.? WHO pays these on your behalf, how do you know they are being paid timely and not late and, ultimately, what do you have to pay in additional fees for something that not only you could do on your own but at little or no cost?
This is an important consideration. Think about it. If you have a rental property with all of the aforementioned fees, does paying these fees affect your ROI or is it a fee that you could have just as easily paid as your own fiduciary to your IRA account?
9) Unfortunately, More Fees! – Review the fine print carefully if you choose an administrator or custodian as your self-directed source. With such accounts, both administrators and custodians will charge a fee for each and every transaction. This might not be bad if you are only self-directing for a year or so. But imagine if you are self-directing for 10 or 20 years. These fees cannot only add up but add up significantly.
Bottom line: do your due diligence on whether you want to establish self-directed status but also who or what entity you wish to use to achieve this status. Remember, part of this due diligence must include not only upfront fees but continuing and on-going fees. There are times when these fees make sense and there are many more times when these fees may not make sense. Remember, it is your money!