Well, I wasn’t going to write about this topic, but after two, almost exact, scenarios in the past week where someone called about termination fees….I just gotta.
When it comes to self-directed IRA and 401K plans, you typically have the option of paying custodian/administration fees on an annual basis, or a one-time fee (with possible annual fees) utilizing a facilitator model. The basic premise is that IF you select a custodian/administrator that charges annual fees, you will be paying fees to that custodian/administrator each and every year you have your plan. And, when you decide to close your account, you will be charged termination fees. Where, typically, with a self-directed IRA or 401K facilitator, you will pay a one-time fee, and have smaller, annual fees associated with your plan. In fact, some plans can be established with NO annual fees of any kind.
Obviously, when reviewing your options from an expense (fee) standpoint, one should graph out how long they may be self-directing and the annual fees associated with self-directing…including the time when you eventually close out your account. The amount of these fees should be compared and contrasted with a facilitator model who will be charging a one-time fee (with no or reduced annual fees). This combined with the fact that most custodian/administrator models do not allow you to have checkbook control of your retirement assets, where the facilitator model does permit this type of individual control. In many cases, you can’t attach a monetary value to one’s ability to control their own retirement account….most people want it if they can legally have that control.
But, let’s put a real life example to this scenario. What happens to “Scott” who called and currently had the following self-directed accounts with a well-know IRA administrator. Here were the facts for Scott (now a PGI client):
Age — 53
Roth IRA — Has a Roth IRA with assets of approximately $200,000
Roth IRA — His wife has a Roth IRA with assets of approximately $200,000
Traditional IRA — Has a Traditional IRA with assets of nearly $150,000
Utilizing the services of this administrator, Scott’s fee for all three IRA plans was $1,200 annually. Honestly, for the marketplace, these fees were, relatively speaking, on the lower end of the spectrum for what custodians/administrators charge….but, hey, it is still $1,200 a year. If Scott were to self-direct for the next 15 years (which is reasonable) with this administrator, Scott would have minimum fees of $18,000…and, not have checkbook control of his retirement funds. Now, in Scott’s case, he is utilizing PGI’s services in establishing a self-directed 401K (which he will rollover his Traditional IRA into) and self-directed Roth IRA accounts (two; one for wife and one for himself). With all of these plans, he and his wife will have checkbook control of their funds.
Scott realized that with the one-time fee (for the establishment of the 401K and IRAs) and annual, lower, custodian fees….that over this same 15 year period of time, he will save around $13,000 in fees that would have otherwise been spent with the IRA administrator. And, as mentioned, he will have checkbook control of his retirement assets. This was all good news for Scott, but then he was thrown something that he had forgotten about. The previous administrator was going to levy a termination fee on all three accounts….to the tune of approximately $2,750!! Yes, you heard that right.
You see, the administrator states that they charge a termination fee of .005% on the assets of the plan. On $550,000 worth of assets spread out over three IRA plans, that totals approximately $2,750 in termination fees. So, here is a good question: why should a termination fee have anything to do with the value of the assets of the plan. Why should, as an example, someone with a $1,000,000 IRA have a higher termination fee ($5,000) vs. someone who has a $100,000 IRA ($500)…does the administrator terminating the IRAs do more work for the 1M IRA? Second, why should the termination be based on plan assets since it is a paper transaction? Third, why should termination fees be that exorbitant?
In Scott’s case, he was going to rollover all of the plans anyway as he saw the “big picture” of money being saved in fees. The termination fees just sealed his decision as he viewed the fee as patently unfair (who would blame him) and no longer wanted to have any relationship with a company that would charge termination fees that accumulate that much and, at the surface anyways, are unfairly charged.
Moral of the story….do your due diligence before you purchase anything…including the fees for self-directed custodians, administrators and facilitators. That applies to most everything we purchase as consumers. Scott learned early enough in the self-directed cycle to save money. There are many others who never truly know the savings they could realize by not paying such exorbitant fees.