Self-Directed IRA/401K Accounts – I Got HOW Much Interest?!

I recently received a call from an upset individual who was claiming that he thought he was taken advantage of by a company that had established his self-directed IRA and was administering the IRA under IRS rules. Please note -– this company did not do anything illegal in any way.

This individual….who we will call Jeff…thought that he had done extensive research, selected the company of choice to hold his IRA and was quite sure he understood the fee structure of this IRA custodian. In fact, what led Jeff to be so upset and to turn on his computer and Google some more key words was not the excessive fees he was paying to the custodian to hold his IRA — but rather a very small, tiny “fee” that made him grind his teeth.

What was this tiny, measly, little “fee” that got him so upset? It was the fact that the custodian of his IRA was keeping 90% of the interest on his funds within his IRA that were not currently being invested in traditional or non-traditional assets. That’s it!

But, let’s break this down a little further. You see, some of you might think that Jeff should have been upset on what most of us would view as some larger issues:

First, Jeff didn’t have checkbook control of his retirement assets himself as he “thought” he couldn’t. If most people knew they could control their retirement dollars and have control of their investment assets…wouldn’t they at least want to consider this benefit or option?!

Second, Jeff just “assumed” that the high annual fee structure was the norm. In Jeff’s case, he was spending almost $1,200 PER YEAR for the “benefit” of self-directing his retirement assets with this IRA custodian’s assistance.

Third, Jeff wasn’t initially upset that at age 46 and the likelihood of self-directing his investments for the next 20 years, that he would be spending over $20,000 in professional fees for the “benefit” of using this custodian for his self-directed IRA.

Fourth, Jeff just assumed that by utilizing this custodian to oversee his IRA, that the custodian would certainly protect him from violating any IRS Prohibited Transactions…as you might have guessed by now, the custodian in no way, shape or form provided this protection. In fairness to the custodian, however, that is not their job….Jeff just thought that if he was spending all this money, that the custodian was certainly doing something “to earn that fee.”

But, you see, it wasn’t these concerns that made Jeff explode and start questioning his initial decision to utilize the services of this custodian. You see, Jeff (at the time of his call to me) had $101,299 that was in his IRA “account” that was not invested in any assets. What blistered him more than anything….even above all of these other valid reasons to maybe be upset, was the fact that on that $101,299 of non-invested funds, Jeff was receiving 1/10 of the bank’s interest on that money!

Who was receiving the rest you may ask? Uh, would you like to take an educated guess?! Well, if you were to guess the custodian, you would be absolutely correct (“Johnny, please tell our contestants what they have won.”). Yep, you got it — the custodian received 90% of the interest on the money that was not being invested. Yep, you would be correct that that just doesn’t pass the smell test…does it?!

Now, in fairness to the custodian, they did advise Jeff of this…..probably in tiny, tiny print smaller than this…but, they did tell him. So, some of you might say “buyer beware” and you’d probably be right. But, Jeff, after calling the custodian to have them explain why they thought it was fair to keep 90% of the interest paid on the account had a different perspective…Jeff’s opinion was that no matter how you slice it, it wasn’t FAIR and why should he continue a relationship (let alone spending significant $$s) with someone who thought this WAS FAIR?!

Oh, I forgot to mention what the custodian told Jeff when he called to complain about this very tiny, small and measly issue that didn’t amount to much in actual dollars and this is what Jeff represented they said (paraphrased):

“All of our clients are fine with us keeping the interest because they understand that it isn’t a lot and it is a way for us to keep our fees low and provide great service for our clients.”

Huh??!!! Folks, what is missing here is not how much or little the custodian is keeping in interest. The issue is whether it is fair, right or otherwise acceptable to you. If one is truly self-directed, is there a reason they should give up 90% of the interest on THEIR money??!!

Try this on for size with a real story that was expressed to me from a “custodian”…and use whatever interest rate you want. This representative had boasted that he had personally brought in over $32,000,000 in retirement account assets of which $8,000,000 was not invested. Well, by now I think you know the answer…who received (and who instead should have received) 90% of the interest on $8,000,000?!

BawldGuy Here: If one applies a nominal interest rate, say the 10 Year Treasury — 3.31% this morning — that custodian collected ‘only’ $238,320 in interest. (90% of $264,800)

Bottom line so we can put this story to bed…do your due diligence on self-directed individuals and companies that establish self-directed IRAs and 401Ks. There is not necessarily a “right” or “wrong” path for you to take. But ask about their fee structures. Ask about maintenance fees, transaction fees. Ask about asset fees and termination fees. After doing this research, consider whether it is best for you to have a self-directed IRA or 401K where you…not someone else…has actual control of the account and are the signer for its investments. You see, when it comes to fees related to self-directed IRA and 401K accounts, what you don’t know about these fees can cost you…a lot.

John R. Park is President of PGI SelfDirected and also provides superb information for those with Self-Directed 401Ks.

Related posts:

1. Self-Directed IRA & 401K Accounts – This is Self-Directed?
2. Some Facts and Definitions About Self Directed IRA’s
3. Self-Directed Custodians and Administrators – Don’t You Protect Me?
4. Self-Directed IRAs/401(k)s – The Maze of Custodians, Administrators and Facilitators
5. Your Self-Directed IRA is Possibly the Worst Mistake You Made?!