Many articles and blogs are written related to self-directed retirement accounts and the value that they can provide to individuals by giving them another avenue in which to choose where they wish to invest their hard earned retirement assets. But much of the time there is little written on how these plans are set up and third party individuals/companies that provide this service. This should be of vital concern for any individual who is considering self-directing retirement assets.
First and foremost, in this arena of self-directing, individuals can establish accounts with either the assistance of custodians, administrators or facilitators. Whichever source is used for assistance, there is nothing wrong, conceptually, with either of the three. However, in this article, the intent is to break down in simple terms what each does and has responsibility for.
In a recently published article by Thomas English for IRAAA, a quick review was done.
Custodians
A custodian is a company who is either:
1) approved and regulated directly by the IRS, or
2) 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.
As these companies are regulated by the respective state Banking Commissioner and/or Comptroller of Currency and FDIC, the establishment of an account through them is generally safe as far as asset protection. Custodians do not advise an individual on where they may wish to invest their assets and do not ensure that an individual will not participate in a Prohibited Transaction. Custodians handle the establishment of the account and process respective transactional related paperwork for their clients. They receive revenue through established set-up and transactional fees and earning interest on cash assets held by their clients.
As English notes, "Some custodians are referred to as 'trust companies' because some retirement accounts are treated like trusts under the tax code." The article suggests that if you want to find out if a custodian is actually a custodian, you can request that they provide you with documentation of such from their respective regulators.
Administrator
An administrator primarily performs the same duties as the custodian in assisting the client in setting up their self-directed account, but they are not regulated by any state or federal agency. They can be established as, in effect, local franchises. They do not, typically, advise you on what is or is not a permissible investment under IRS regulations, similar to a custodian. Similar to a custodian, they receive revenue through account set up fees, annual maintenance and transactional fees and the interest on cash assets held by their clients.
Some administrators will also accept the deposit their clients monies. While a very common practice with many administrators a logical question is why would a client want to deposit their monies through an administrator. As English notes in his article,
"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; and
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)."
As most people know with a custodial arrangement, oversight regulators can take over questionable firms if they feel they are not complying with state regulations. Custodial firms also must conduct audits on their book. Administrators do not fact this same type of review English continues:
"Administrators are not subject to these same demands. This can leave open opportunity for fraud. If you were to roll your funds over to an administrator and the company disappeared with your funds, you would have a difficult time recovering them, if at all. That kind of fraud is unlikely to happen with a company strictly overseen by banking or IRS regulators."
One may want to ask themselves if their is really any benefit to handing over their hard-earned assets to someone other than themselves or a custodian (notice I said to themselves...that will be discussed here shortly). While not a criticism of administrators, handing over these monies does not really have any true benefit to the individual but can have to the administrator as they earn interest on these monies. Bottom line: no direct benefit to the client but an increased (even if very small) potential for substantial risk of loss or liability. Often times, administrators will mention that custodians are unable to give investment advice legally (e.g., as they are chartered as self-directed ‘passive” custodians) while some administrators do give investment advice.
A client should really ask an administrator the following questions:
1) Can an administrator give their clients "specialized" advice about their situation and potential investments?
2) As an administrator is not regulated or registered with the state as a financial or banking institution, how are client assets held? If an administrator were to become financially insolvent, what happens to the assets? If tied to properties, how will title be cleared for the client?
3) A client should specifically ask about initial set-up fees, on-going transactional and account maintenance fees. Do they earn, and how much do they earn, interest on a client's money?
4) How long does it take to receive monies for investment purposes?
5) If a client's assets are tied into an investment (e.g., real estate) where on-going fees, maintenance fees, repairs, taxes, etc. must come from an account, how does an administrator process those payments on a client's behalf and what are their fees for doing this for the client? How does the client KNOW these fees are being paid?
6) What are annual administration fees for "held" assets? For example, some administrators will have a fee for each asset held within the self-directed account. Some will have an additional fee for a "held" liability. So, if within an account a client has a property and a mortgage (e.g., non-recourse loan), will the administrator charge the client twice for the asset and the liability?
Facilitator
Utilizing a facilitator is a relatively new option available to the client. The "experience" range with facilitators can be from the novice to the extremely knowledgeable. It goes without saying that whether one is using the services of a custodian, administrator or facilitator, due diligence should always occur.
A facilitator may typically assist the client into moving their assets into self-directed status through the use of an LLC. If structured correctly, this is not only legal but gives the client a greater level of asset protection and gives them true control of their own assets in a "checkbook" account at the financial institution of their choice. They (the client) actually serve as an administrative fiduciary to their own retirement account. This is, as well, a permissible and legal activity.
A mantra of the facilitator is that they are assisting YOU to take control of your own retirement assets. That being said, the client is in control of their assets, they are deposited with a financial institution (state and federally regulated and insured) and the client has immediate access to their assets if a timely investment opportunity comes along.
With regard to fees, since a facilitator is not "controlling" the assets or processing transactions from your account, they will typically have a larger, one-time fee. The fee, if structured correctly, should be for making sure that the self-directed account is correctly and legally set up and to provide on-going education related to what the client can invest their assets into. In many cases the one-time fee will, in the long run, be less than the on-going fees charged by custodians and administrators.
Facilitators often assist the client with all transactional activities associated with establishing a self-directed account, but they are not the custodian. IRS rules require that monies be placed with a custodian. As has been pointed out, this can occur through a custodian, an administrator and a facilitator (through a client having custodial control of their own assets in a state and federally regulated financial institution).
English concludes in his article that:
"In fact, regulators such as the SEC and FDIC have recently become concerned with the LLC concept of “checkbook control” often promoted by facilitators for fear that investors will either act on inaccurate advice from facilitators or inadvertently enter into a prohibited transaction on their own; invalidating their IRA and resulting in taxes and possible penalties. While there is no guarantee that working with a trustee or custodian directly will eliminate the possibility of a prohibited transaction, experienced, reputable, knowledgeable and regulated firms will look for these as part of their service and inform you if they see something problematic."
While a valid statement, it does go back to due diligence on the part of the client....whether a custodian, administrator or facilitator is utilized. There are NO safeguards, whether assets are placed with or through a custodian, administrator or facilitator (through a client's own checkbook control of their assets), that a client will not participate in a prohibited transaction. NONE. In fact there are many IRS cases where custodians and administrators have allowed their clients to participate in prohibited transactions by performing the transaction on behalf of their client. Which, by the way, is another great question to ask a custodian, administrator or facilitator -- how and will you assist me in making sure that I do not enter into a prohibited transaction as defined by the IRS?
Hopefully, this breakdown on Custodians, Administrators and Facilitators will greatly assist those that are seeking self-direction of their retirement assets. As mentioned, it is not that any of the three are good or bad, right or wrong....but which will provide the services and education that best serves the client's needs.
Finance 
