There was a time when a custodian account was the only way to invest IRA and 401(k) money into alternative assets, such as real estate, tax liens, gold, private businesses, and more.
Self-Directed IRA custodians have been around since the 1980’s. The history of “Self-Directed” IRA and 401(k) accounts begins with them.
What is a custodian?
IRA accounts are required by law to use a holding institution, as trustee. This is usually a bank or a trust company—the latter is essentially a “bank” that does not give loans and only takes deposits. Because the bank or trust company does not make investment decisions as trustee, they are called a “custodian” to differentiate from a full-service trustee.
A few brave custodians paved the way in the 1980’s for smart investors to use their IRA and 401(k) money to invest in alternative assets. Into the 1990’s and 2000’s, custodians continued to be the gateway to Self-Directed IRA investing.
Then in 2002, the Solo 401k first came on the scene, but didn’t get its “superpowers” until late 2006. That’s when a new law (the Pension Protection Act) said a Solo 401k account can receive rollovers, just like an IRA. That new law opened up trillions of dollars of pre-existing IRA and 401(k) money that became eligible for rollover into Solo 401k accounts.
Is a custodian required for a Solo 401k account?
We believe 2006 marked an end of an era—the custodian era—for Self-Directed investors. From 2006 onward, custodians were no longer required for smart investors to invest with a Self-Directed Solo 401k account.
We launched the first non-custodian Self-Directed Solo 401k solution in 2006, and have led the way on the exciting new frontier of Self-Directed investing.
What would a custodian do for a Solo 401k?
- Review transactions. Instead of self-directing investment transactions freely, a custodian introduces themselves as a third-party intermediary to the transaction.
- Deny some transactions. With a custodian-based Solo 401k, you may experience some transactions that are legal and lucrative, but are denied and cancelled without your consent. This can cause you to lose the profit of the investment deal you wanted to wanted to purchase.
- Approve/complete some transactions. After some review and processing time, some transactions may be completed and purchased with your 401k funds.
- Charge additional fees. Custodians often charge fees based on account values, reviewing transactions, writing checks, depositing checks, sending and receiving wires, holding titles, and other administrative activities.
What exactly are they reviewing?
Legal compliance? No.
Risk and reward? No.
What’s left? Well, the truth is that in the past 5 to 10 years something alarming has happened. Many of the custodians marketed themselves as if their transaction review process was responsible for making sure the investor is complying with Self-Directed IRA rules and regulations.
Then some of their accountholders made bad investment decisions, lost investment money and tried to sue the custodians for approving the transactions. In nearly all court cases, the custodians were found to be not at fault because the account paperwork clearly stated that the custodian is not responsible for making sure the investor makes good investment decisions.
Naturally, the custodians have responded by asking themselves “Could this get us sued?” when reviewing each accountholder investment transaction request. This has resulted in many transactions being denied and canceled by the custodian simply because they were unfamiliar and/or uncomfortable with the transaction for fear of being sued.
The problem with custodian policies
The problem with this is that the world of Self-Directed IRA/401k investment into alternative assets brings unlimited possibilities. There’s no way bureaucratic custodian organizations can keep their administrative employees familiar with all the different kinds of investments happening in the truly free market. These administrative employees process hundreds of thousands of transactions each month.
Due to the aging of the Self-Directed IRA custodian business model, trying to self-direct your investments with them has become an increasingly bureaucratic experience. This is troubling to the investor who seeks greater freedom, wealth and success.
The benefit of having the checkbook in your hands
Our Unlimited® investment platform was designed to solve these problems by putting the checkbook in your hands. You write the checks—with no transaction fees and no delays.
This is the benefit of being your own trustee. Instead of a legal quagmire of potential law suits, you get simplicity and freedom.
Is skipping the custodian dangerous?
Self-directing your alternative investments without a custodian is no more dangerous than not registering your car in 49 extra states. Both are simply unnecessary and expensive.
Custodians are not responsible for your success, yet they simultaneously cancel requested investment transactions out of fear of being sued. This eliminates the value proposition for the custodian-based Solo 401k.
A true comparison can be seen as follows:
We believe complying with applicable IRA and 401k rules and regulations is important. That’s why we teach a class to all our new accountholders each month, showing the best practices and making it easy to learn how to be in full compliance when investing.
The truth is the rules are rather straightforward and the attempt to find ways to bend the rules is the only thing that introduces complexities.
We’re the only facilitator that regularly visits with multiple government agencies in Washington, D.C. to stay on the leading edge of keeping self-directed investments compliant and to regularly teach classes making it easy for our accountholders to stay in the know.