Today brings another ‘slam dunk’ expert as the newest contributor here. John Park owns PGI Agency a firm specializing in Self-Directed IRAs and 401Ks. His company helps those who prefer more actual, hands-on control of their qualified plans. Welcome to BawldGuy Talking, John.
It CAN really feel like a maze sometimes!
More and more self-directed “providers” are popping up and clients (YOU) begin getting confused regarding one company that states they are a custodian, another that says they are an administrator and yet another that serves as a facilitator, and so on. They know that surely there must be a difference between them, but typically could not even begin to explain the differences.
It is important that they know. Not only is the path you take potentially affecting the manner in which you control and grow your retirement fund assets, but there are real and philosophical differences between the three models. The mantra of these providers is that their clients “take control of (your) retirement assets. Protect the hard earned money that you have set aside.” There is a large element of truth in this which also dictates that there is a large element of truth that the client should know the differences between what actually is a custodian, administrator and facilitator.
Listed below, hopefully, in layman’s terms, is a brief description of each:
Custodian: A custodian is a company who is either approved and regulated directly by the IRS, or affiliated with or owned by a bank or trust company and subject to regulation from their state Banking Commissioner and/or the Comptroller of Currency and FDIC. Custodians handle the formation and maintenance paperwork for your retirement account as well as handle the money for you. Because all custodians are regulated by banking officials or the IRS, trusting them to handle your money is generally safe. Some custodians are referred to as “trust companies” because some retirement accounts are treated like trusts under the tax code.
Administrator: An administrator is a company who handles the formation and maintenance paperwork required for your retirement account. Some administrators actually handle your money and accept deposits as well. In this regard, an administrator actually acts like a middle man between the retirement account owner and the bank where the deposits are eventually held, even keeping records, and providing statements, etc.
While serving a purpose, allowing an administrator to handle your money can be problematic for three reasons:
1) Your account’s assets are often pooled with other people’s accounts which could subject your funds to additional liability;
2) Asset pooling can sometimes result in the administrator taking much longer to follow through with your transaction directions than it would take when dealing directly with a custodian (e.g., there can be confusion over who to talk to — administrator or custodian);
3) There is no strict IRS, banking or other regulator overseeing administrators.
Bottom line, even if the administrator meets items #1 and #2, they will not meet #3. Also, in many cases, administrators are “franchise” organizations who are interested in profits. What most people also may not know is that when a client’s funds are on deposit at the administrator’s financial institution and not “actively” invested into an investment, it is typically the administrator company that earns the vast majority of interest earned on the account. Philosophically, if nothing else, a client may believe that to be unfair.
Facilitator: A facilitator is normally a company that provides advice and consulting. In this category, we are talking about all companies who call themselves facilitators, advisors, or consultants. Many facilitators assist in structuring investment strategies, often involving LLCs. It is common for investors to want to have “checkbook control” of their retirement funds. Facilitators often serve as a “one stop shop” and will handle everything for you, including your funds rollover and any paperwork or filings required to enact your strategy. In choosing a facilitator model, a client may wish to stay away from a firm that wishes to “assist” you with investing your retirement funds. In the purest of models, a facilitator should be viewed as a model to provide professional assistance in establishing your plan, as compared to wanting to invest your hard-earned retirement assets.
In layman’s terms, a custodian will typically have control of your asset(s) within your self-directed IRA/401(k) but will not give investment advice. The pros, as stated, is that they are a neutral third party who should review your investment decision to make sure that it is not a prohibited transaction. Whether they do or not MAY be another story, so it is always good to check. The cons can typically be lack of response in expediting the investment process and high account maintenance and transaction fees. Also, while they are, in theory, there to protect you, typically the fine print of their paperwork specifically states that they are not responsible for your investment decisions….which leads one to ask…”why are you there then?”
In layman’s terms, one might believe that an administrator and a custodian are similar in scope and function. However, as previously noted, if an administrator is simply a “franchise” and does not need to adhere to the same restrictions as the custodian, then one may question what true benefits the administrator brings to the proverbial table. One should question the fees, who holds the money, etc. etc. In this world of self-direction, one might wish to review the strengths vs. liabilities of utilizing an administator only.
In layman’s terms, a facilitator is the “one-stop-shop”….sorta, kinda. Self-directed plans do need a custodial arrangement which a facilitator is not going to provide. However, what most people do not understand is that they, themselves, can actually serve as the manager of their retirement account and have their retirement assets deposited with an FDIC insured custodial arrangement of an LLC. Not only is this legal, but some may prefer it. Further, what most do not know, is that a 401K plan can be safely structured without this “custodial” structure.
But be aware…facilitators may be operating with ignorance or greed. As more and more people are considering self-directing, supply meets demand and not always in the best way. While it is not suggested that a self-directed IRA/401(k) facilitator would not know all rules related to prohibited transactions, etc., do your due diligence on them. As it relates to fees, this can be good or bad news to the client. Many facilitators will charge their clients a one time transactional fee to establish them in self-directed status with all mandated transactional requirements. Be wary of those facilitators that charge an on-going account maintenance fee when they are not earning that on-going compensation.
John Park is President and Founder of PGI Agency, Inc. and PGI SelfDirected. You can call John at 866-331-6350.