Self-directed Ira/401k Accounts -- I Got How Much in Interest?!

This author received a telephone call from "Joe" the other day. Joe was quite upset with a self-directed IRA administrator he had used to assist him in establishing a self-directed IRA for non-traditional asset investments.

What was Joe so upset?

Well, Joe was upset because he didn't read the fine print of the contract he had with his IRA administrator regarding what he was being charged in account maintenance and balance fees and transactional fees. While the fees incurred were significant, what really set Joe into a tizzy was the interest that he received for his "non-invested" money.

You see, on his "non-invested" monies, Joe received 1/10th of 1% in interest. That's right, folks. Joe received 1/10th of 1% interest. You may be thinking, "wait, don't banks pay a little more than 1% in interest...or at least more than 1/10th of 1% interest?" You would be correct. So, who received the "extra" interest? You are right, again. The administrator of Joe's IRA, in this case, received the difference between the 1/10th of 1% and what the bank was actually paying. Does this seem fair?

Let's review the actual numbers behind Joe's portfolio in his self-directed IRA.

-Joe transferred $502,497.36 from his traditional IRA into self-directed status.
-With this money, he purchased three (3) assets which were held by the IRA.
-After the purchase of these 3 assets he still held $101,299 in a money market account held by the IRA in the name of the administrator and Joe (notice, the money was held in an account in the name of the administrator and Joe).

As Joe was in his first year of the investment and has not yet received any return on his investment, here have been his fees:

1) $50.00 account set up fee;
2) $250.00 per asset fee ($750.00 total) for the holding of the three (3) assets;
3) $95.00 per asset ($285.00) for an asset purchase fee (and, yes, there will be a $95.00 per asset fee when the asset is sold); and,
4) $25.00 processing fee per asset ($75.00 total).

Intoto, for Joe to self-direct his investments for the first year, the cost to Joe is $1,160.00. Wait, that's not it. If Joe kept the exact same assets each year for the next 10 years (which would be unlikely....if not, the fee would be more, of course), Joe's minimum, annual fees would be $7,500.00 (3 assets @ $250.00 per asset). In this example, Joe is 46 years old. If he were to self-direct these assets for the next 20 years, his minimum fees during this time period would be $15,000.00. This is some serious money, folks.

And, possibly more important to Joe, he is paying this money and not having true checkbook control of his assets AND not having true control of his assets. When he learned that it is possible to save on fees through a one-time fee and not be charged for every transaction that he executes (since he can execute them himself), he was a happier guy!

The amount of these fees would probably be enough to upset many who, wanting to self-direct their retirement assets, wish to be compliant with IRS regulations but also minimize transactional costs, thereby increasing their ROI. However, as was pointed out, what upset Joe the most was the interest he didn't receive on his money. On his non-invested assets of $101,299, he received interest totalling $101.29!

Obviously, Joe needed assistance establishing his self-directed IRA; however, Joe felt (after the fact) that provided he had professional assistance establishing a compliant self-directed IRA, he could execute any necessary transactions for his investment....without paying fees to a third party.

Oh, and Joe felt like he could earn something better than 1/10th of 1% interest on his non-invested money!

Bottom line: Do your due diligence of fees associated with self-directed IRA and 401K accounts. Most people do not realize that they can have true checkbook control of their retirement assets and do not have to pay on-going fees to be in this business of self-directing. You see, what you don't know about self-directed IRA and 401K account fees can cost you....a lot.

John R. Park is President of PGI SelfDirected and co-founding Partner of Fulcrum Investment Network.