Expanding the Scope of Employee Retirement Plan Options
By Daniel A. Cordoba, Principal, Asset Exchange Strategies, LLC
Today, many employees take advantage of the tax benefits that company-sponsored 401Ks, in addition to IRAs, afford them in investing for retirement. However, relatively few are aware that, in addition to investing in traditional stocks and bonds, non-traditional assets—such as vacation property, note financing, golf courses, franchises and other assets—are also permissible assets within an IRA. Investors in the know are now beginning to take advantage of this fact and are diversifying their retirement portfolios by investing in the booming real estate market, purchasing capital in private start-ups, and more.
The Self-Directed IRA (Individual Retirement Account) Defined
A Self-Directed IRA (and other retirement accounts such as SEP, Simple and 401 (k) Solo) is a plan in which the IRA holder has directional control over asset allocation. There are only a few investments that the IRA cannot invest in and there are certain parties that the IRA cannot participate with. Within those guidelines, however, the IRA holder is free to invest in whatever assets they feel will bring them the greatest returns and/or security, depending on his or her personal investing goals.
Historical Development
When the ERISA act of 1974 was passed, it ushered in the ability for the average taxpayer to provide for retirement on a tax-favorable basis. This era brought into existence the most prolific retirement savings program known to mankind. Anyone could now provide for his retirement on a tax-favorable basis.
Although most people believe that the IRS is the governing agency, it is actually the Department of Labor that is charged with the management of retirement plans. The IRS’ function is to police the codes that define parameters of each retirement account.
The Department of Labor supplied the IRS with guiding documents, known as a plan document that provided the restrictions for each of these retirement plans. 401(k) covered the now popular employee retirement plan and the 408 governed the IRA. The plan document defines which assets are acceptable and their method of allocation. This plan document provided the asset manager parameters within which they could work.
Upon the development of the plans the securities and insurance providers began to draft plan documents for employers that offered 401(k). These retirement plans, being complicated, carried a sense of awe about them, and corporate officers became dependent on the provider of retirement plans for their compliance expertise. Of course, these same providers created their own plan documents for the investment assets of IRA holders. With the fox being deeply entrenched in the hen house, at this point the only assets offered in the programs were securities and insurance products. Simply put, real estate and other non-traditional assets were not offered.
Recent Developments
Economic episodes and growing investor education through the Internet have created fertile ground for the custodian of Self-Directed IRA and other retirement plans. With the passing of the market correction of 2000, September 11th and recent corporate abuses, investors were actively seeking alternative investment vehicles for their retirement capital. At the same time, the Fed had reduced interest rates to their lowest position in decades, thereby fueling the real estate market. With the real estate market prospering, many retirement holders wanted to take advantage of equity gains in that market. This economic episode, in conjunction with the rise of the Internet-driven Information Age and investor disgust, initiated the migration of non-traditional assets into retirement accounts.
Beefing Up Employee Benefits Options
While an increasing number of individuals are discovering the self-directed IRA option as a smart alternative to traditional stock market investments, most companies are not aware of, or neglect to offer, this option to their employees because their plans are sponsored by a traditional brokerage firm for which it is outside the scope of the their offerings. Organizations can add appeal and value to the retirement benefits they offer by making their employees aware of the option to invest their funds not only in stocks and bonds, but in non-traditional assets as diverse as: real estate, natural gas technologies, bridge loans, currency exchange, marinas, ATM machines, golf courses, motels and numerous others, in which they are knowledgeable or personally interested and/or that may be profitable investments to leverage within their IRAs.
The Role of the Self-Directed IRA Advisor
It is impermissible for an IRA custodian to offer advice to the investor. They must maintain a neutral position and can therefore only convey the IRS regulations and their investment policies to the investor. Still, there is understandably a need among investors with a desire to leverage non-traditional assets, such as property, with their IRAs for this type of advice. Companies who arm their employees with this knowledge should be prepared to educate them on what to look for in (or offer them a ready-made relationship with) a Self-Directed IRA Advisor.
The Self-Directed IRA Advisor should have the expertise to provide the investor with advanced methodology and advice. A good Self-Directed IRA Advisor will be able to offer the following benefits:
Advisory Support and Education – Educates the investor and helps to put all the pieces of the Self Directed IRA puzzle together, enabling them to see the bigger picture and make the most educated investment decisions.
Checkbook Control – Provides the ability to write checks with IRA funds through an IRA LLC.
More Economical – Individuals are matched with an IRA Custodian based on their specific needs.
Increased Control – Offers investors the ability to structure their own deals without custodial micro-management.
Protection – Protects from creditors and litigation, through increased overall asset protection.
Staffed Tax Attorneys – Enables the advisor to provide accurate information and flexible tools to satisfy investor objectives.
Conclusion
With the many advantages that non-traditional IRA investments enable, including greater control over investment options, tax favorable income and, perhaps most importantly, the ability to safely count on higher returns with less risk than the stock market, it can be a highly valued vehicle for investors of all levels. Employers can supercharge their benefits plans and add value by passing this knowledge to enrolled employees and directing them on working with an advisor who can assess their unique objectives, risk tolerance and other factors, educate them on the full breadth of their options and help them to institute a program that allows them to select from a vast array of investment choices while minimizing risk and liability.
To learn more about the Self Directed IRA LLC, visit Captuity.com
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