Self-Directed IRAs & 401Ks…Are HIGH Fees Really Required?

You should really watch this video BEFORE you read this blog…and, maybe you have. In the world of self-directed retirement plans, there are many different options on how to self-direct and, with these options, different structures of fees.

Just like the commercial, you may not want to have that same feeling with fees for your self-directed IRA or 401K. You see, part of self-direction (for most folks) is to get away from all fees and control by a third party. I guess one could wonder WHY, unless legally required, should any individual or entity be paid fees if you are self-directing….c’mon, we know you wanted to ask!

Even though this is a common-sense desire and a question one might ask an IRA administrator or custodian, typically it is just viewed that “that is the way it is.” To be true, an IRA (self-directed or not) requires that a custodian be in place for the IRA….so, you will have to pay some type of annual fee, but are some of these “higher” fees really necessary? Isn’t really your primary interest self-directing YOUR money? Might one be interested in paying a one-time fee and then being done with all the on-going annual fees?

Most people are not aware of self-direction and, even when they are aware of self-direction, believes that EVERYTHING needs to be processed with a third-party entity…meaning, they cannot control their own retirement checkbook. Nothing could be further from the truth. The IRS does not say that an individual cannot control their own retirement checkbook. And, in the case of 401K plans (again, self-directed or not), there is nothing requiring that a “custodian” hold the 401K (check it out…there is nothing there). The custodian requirement is mandated for IRAs…but, again, it does mean one can’t have control of the retirement checkbook.

So, that brings us to what most refer to as a “facilitator”. A facilitator (individual or company) can assist an individual in establishing their IRA or 401K where the client has checkbook control of their retirement assets and typically are charged a one-time fee for this ability. While an IRA still must be held by an IRA custodian, there are custodians, with the assistance of legal paperwork provided by the facilitator, will allow checkbook control of their IRA assets through what is typically called an “IRA LLC.” When it comes to 401K plans…there is NO requirement for the custodian. So, the moral with the 401K is that I am not sure why anyone would want to pay transaction and asset fees for a 401K…but, more on that in a different blog post.

In contrast, administrators and custodians will typically NOT offer their clients checkbook control of their retirement assets and, even when they do, they still are charging annual fees….I am not still not sure that I can logically explain why this happens other than for custodian and administrators to keep bringing in revenue 🙂 Second, while the facilitator typically charges a higher, one-time fee to the account holder, these fees over time (on average) have lower fees over the course of time spent self-directing their retirement investments. Don’t believe it? Do the math. To many, this makes the decision to self-direct using a facilitator an easy one.

However, in contrast, administrators and custodians will typically heavily market their plans. Don’t believe it? Just do your Google research and see how prominent the advertising is in this arena. It is not necessarily wrong or bad….but, at the end of the day, who pays for the advertising of these companies….that’s right, the consumer (you). Obviously, all businesses need to make revenue, but many of these companies have taken advertising to a new high (or low), including television advertisements. Again, who pays for this directly and indirectly? With a facilitator, the account holder not only has checkbook control of their funds BUT, typically, from that day forward you will either pay no fees or annual fees of some sort. The thinking is that the client will escape the constant nickeling and diming on fees and will save fees over the course of self-directing their retirement account.

As the old saying (or maybe it is my saying) goes: “Who is a better steward of your money, the person who needs it (you) or the person who is paid to invest it?”

One interesting point always comes up with individuals looking to self-direct but not wanting to place all of their retirement assets in non-traditional assets investments. They typically ask the question about how they can keep a portion of their assets into traditional offerings (e.g., stocks, bonds, mutual funds). PLEASE keep this in mind….most self-directed structures charge additional fees for this and the question, again, is why. If you did an unscientific study with individuals about self-direction, wouldn’t their definition probably be, “I control my checkbook, I don’t constantly and continually pay fees and all my funds are in one account where I can do anything I want just from that one account.” Okay, well, maybe it wouldn’t be word for word that way…but, you get the point.

A word to the wise when going down this path….ask this question to either the custodian, administrator or facilitator who is assisting you in setting up either your self-directed IRA or 401k. With many custodians, administrators or facilitators, they will assist the client in setting this up, but the client has to pay a transactional fee, account maintenance fee, or both just to perform this function. This does not have to occur and, if it does, it should be a very modest fee.

Individuals enter into agreements to establish self-directed IRA or 401k accounts because: 1) they feel they can do a better job of investing the money than who they are currently paying (e.g., broker), and 2) they feel they can minimize their expenses. Why should they move their retirement assets and pay some other entity a transactional fee or account maintenance fee just to buy the same stocks, bonds and mutual funds they may have owned before going self-directed?

If truly self-directed, an individual should be able to take control of the transactions and the investments they may make without paying additional monies for transactions. Individuals should be and are able to only pay for the transaction of establishing the self-directed accounts within IRS regulations on a one-time basis, not incurring a charge every time they conduct transactions within their self-directed account. This is typically referred to as a “true checkbook control” of their account. Even though some of these “true checkbook control” custodians, administrators or facilitators levy additional fees just for the execution of transactions by the client.

Self-direction? A great idea for many. However, one should conduct their due diligence on who they may utilize to assist them in setting up this account, but also feel comfortable that they are not “pumping the meter” every time they conduct business.