Tuesday, September 4, 2012

Self-directed Ira/401k Fees -- What Gives?!

It is fair to say that any of us, regardless of what we do for a living, need and should be compensated for our livelihood. This goes for any facilitator, administrator or custodian of self-directed IRA and 401K accounts. In many cases, not only is a client paying for the services rendered, but also the expertise of the individual or firm providing the service.

However, with the plethora of individuals/firms providing services in the arena of self-directed IRA and 401K accounts, there are some unique differences in the amount of fees charged for these services. Please note that this article is not intended to call into question what fee structures are being utilized, but to educate individuals on some salient points related to these fee structures.

First, as a reminder, there are practical differences in services rendered by facilitators, administrators and custodians which may significantly justify a particular fee structure. One must determine if the level of services warrants certain fees. For a refresher on the differences between facilitators, administrators and custodians, please review a previous Fulcrum investment Network blog.

For the buying public, I recently investigated the fees of two administrator companies to determine the costs associated with establishing a self-directed IRA or 401K. In fairness, the information provided herein was confirmed with both companies. Note: an interesting point. Both of the companies, while not personally establishing a SD 401K, will "farm it out" to a third party and prefer not to do 401K plans accordingly.

To draw a conclusion, one must understand the hypothetical parameters utilized in comparing costs and fees, etc. For this article, the following hypotheticals were used:

0,000 -- amount to be transferred from a "traditional" custodian to the new company (administrator).
Investments Owned by the IRA/401K -- 4 (two real estate holdings and 2 mutual funds).
Assets Held -- All 4 assets were held for the year and then sold at the end of the plan year.
,000 -- amount in liquid, money market account within the IRA/401K.

Company A

Account Set Up Fee (Initial Fee) $ 50.00

Investment Transaction Fees $ 800.00 (0.00 per asset transaction, both purchase and sale)

Annual Account Maintenance Fee $ 1,000.00

Minimum Total First Year Fees $ 1,850.00

Company B

Account Set Up Fee (Initial Fee) $ 50.00

Investment Transaction Fees< $ 800.00 (0.00 per asset transaction, both purchase and sale).

Annual Account Maintenance Fee ,850.00

Minimum Total First Year Fees ,700.00

Wait (Wait #1), that's not it!

This example is for an IRA. The costs for a self-directed 401K increase by a minimum of 0.00 for an annual review of the 401K plan document to ensure compliance.

Wait (Wait #2), want more?? The aforementioned fees do not include any of the following (that a client may or may not utilize):

Domestic or International Wire Transfers;
Cashier's or other Official Bank Check;
Overnight mail;
Returned items of any kind;
Reprocessing of incomplete documents;
Loan or Mortgage Servicing Set-up and Deman for Payoff;
Re-registration of assets;
In kind distributions;
Partial or Full Termination fees; and,
Late fees.

WAIT (Wait #3). Remember in the aforementioned example, ,000 was left in a liquid, money market account? In the case of these two companies, any funds that are retained in the account and NOT invested into a traditional or non-traditional asset, receive interest. Well, we do know that interest rates vary; however, a client with either of these companies receive 1/2 of 1% interest on that money while not invested. Is this a revenue source for the administrator/custodian? Absolutely. Because while we do know that banks are not paying much in interest on such accounts, my last observation was that they were paying more than 1/2 of 1%. Therefore, the additional interest is retained by the administrator/custodian.

Please keep in mind that the aforementioned example with the two companies is an illustrative example of what is "out there" in the market place. It is not to suggest that these two companies' fees are either the highest or the lowest. It is also not to suggest that their fees are not justified. A consumer must do their due diligence to determine not only their comfort level with any facilitator, administrator or custodian but also know exactly what they are being charged in fees so that they can do diligent shopping of services.

If one are interested in self-directing, do it! Just be thorough in your due diligence. The amount of fees you pay does make a difference not only to you and your pocket book but also to your ROI (return on investment). No one wants to see their ROI gobbled up with fees.

John R. Park is President of PGI SelfDirected and co-founding Partner of Fulcrum Investment Network.

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