Self-Directed IRAs and 401Ks – You Don’t Have Be All-In — Playin’ the House’s Rules

I play recreational poker about once a year usually with the nephews for braggin’ rights. The game can be fun to play and, even playing with nephews, it can increase the heart rate a bit. Thank goodness they fall for my incredible theatrical talents at the table and I usually collect all their chips.

Well, while poker may be fun to play and tell stories about, it only serves in this article as an analogy with what may be happening with many individuals who are setting up self-directed IRAs and 401Ks. Many people are tired of the Wall Street yo-yo of up and down performance. And, it certainly can’t make one’s heart or stomach feel any better.

Consider some facts.

We must understand that while the S & P 500 has made a rebound of sorts in recent months, the market is nearly 25% less than it was 10 years ago. Also, when taking accounting for inflation, these numbers are even more disconcerting. In addition, many people who were counting on home values as part of their “assets” have seen their homes, on average, dip 30 -40% in value. Foreclosures are at a record high and…does anyone remember the days of equity in their home??!! Possibly the saddest aspect, however, is that this happened to many, many people and these individuals had no plan or call to action to take control of their retirement assets.

So, what does this have to do with poker and going “ALL IN”? People have severe angst with Wall Street and want options. They are tired of losing money, feeling like they literally have no control and are further infuriated when they know that their broker still makes commissions…whether their account gains or loses in value. They are desperately searching for options. Like in poker where the player has the smallest and dwindling pile of chips, they tend to take the approach of “ALL IN” as they feel they have no other viable options. In many cases, they are desperate and are searching for options.

This anger, worry, sadness…whatever words you want to attach to it…instinctively leads people to react in two very common ways. First, they may resign themselves to the attitude “woe is me” and that there is nothing they can do other than try to ride out the storm and hope for better days. The “put your head in the sand” approach is easy to fall into. A second approach may be to develop an “ALL IN” mentality and completely reverse their course of action and invest in assets which will lead to a more stable end game.

Most people are not aware that they can self-direct their retirement assets. Or they may know that this option exists, but have been scared to take that step. When the individual DOES take that step to self-direct, many take on the “ALL IN” mentality and forgo and forsake the “traditional” investment world’s view of “what works”.

Just like poker, an individual can go “ALL IN” or make other types of bets (options with investments). But the moral of the story here is that one doesn’t have to go “ALL IN” with their self-directed IRA or 401K. They have the ability and option to do so. They have the option to figure out what the “advisor” at work wouldn’t tell them because it simply didn’t fit with what they had to offer.

Now, it is true that many companies who assist individuals in establishing self-directed IRAs and 401Ks have imposing fees. These fees may make it difficult for the typical individual to justify owning several or multiple assets. They question their ability to achieve a good ROI when significant fees must be paid just for the ability to self-direct. They tire in their research and are disgusted that companies charge fees for practically everything. When spread out over many years, individuals can easily spend tens of thousands of dollars in fees just to self-direct…all this and still not actually have true control of their retirement assets.

What to do?

Determine IF you want to self-direct your retirement assets. Get educated on the process and difference in companies (i.e., custodians, administrators, facilitators) that assist with establishing self-direction for their clients. If you choose to self-direct, your eyes will be opened to a world of potential investment opportunities…but you have to make the choice that you want those options.

IF you do want to self-direct, determine if you want to hand over checkbook control to someone else or do you want control of the checkbook.

Understand the fee structure of the companies.

One company may have a one-time fee. Another company may have annual, on-going fees. But compare apples to apples. The company charging a one-time fee may charge a fee that represents 3 years of fees with another company. But, will you be self-directing for one year — ten years — 20 years? Bottom line is to consider working with a company/individual whose fees will not penalize you for: 1) growing your plan (why should you pay more in fees for increasing the value of your plan?); 2) owning multiple and several assets within your plan; and, 3) owning both “traditional” and “non-traditional” assets within your plan.

Education and Support -– Do you feel the company has a strong knowledge base in this field and will they be there to assist you in the future with questions you may have. Do they provide this assistance, do they charge for this assistance, etc.?

Trust -– An oft-used and sometimes lightly regarded word. Do you trust the company/person with whom you’re working? Are they interested in education and assistance or making a sale? In establishing this trust, it is always okay to ask for testimonials and the ability to speak with current clients.

Self-direction allows you the ability to go “ALL IN” but, more importantly, it gives you the ability and option of choosing in what you want to invest, when you want to invest, where you want to invest, how much you want to invest, etc. If structured correctly, you will have full control and you just may not have that fearful thought that your only option is to go “ALL IN”.