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Using IRA Record Keepers: Service, Safety, and Sanity

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03-11-2009

Rather than demystify, he ended up obscuring the truth. It’s always great when people try to help others understand complicated rules of the financial world, but let’s get the facts straight.

I wish that English had taken the time to speak with someone who is familiar with how custodians and record keepers work together rather than those who view them as competition or may simply be unknowledgeable. His sources are Tom Anderson, president and CEO of PENSCO Trust Company, which offers self-directed services like The Entrust Group but uses a different model, and Jeff Nabers, the founder of IRA Association. Spreading these types of untruths are of the ilk that lead people to hide money under the mattress because you can’t trust the banks.

As part of the banking industry for over 40 years, including being a bank auditor and owning several bank-related organizations, I know these concepts can be confusing to investors. Whenever it comes to money and our hard-earned dollars, we want to know that our nest egg is safe. I understand the concern—I feel the same way about my funds. So let’s not spread unnecessary fear about an industry that is tightly regulated. In response, I would like to address some of the confusion and misrepresentation regarding administrators and record keepers.

Tom English brings up two key issues in his article: whether administrative services are necessary and whether they are safe.

To address the first concern about necessity, we can ask ourselves if any service that we pay for is necessary—from house-cleaning to getting your car repaired to preparing our taxes. Any of these you could do yourself if you have the time, skill, or interest. There are books you can read, courses you can take to master any service.

The Entrust Group has over 50,000 customers who have used our record keeping services for decades, because they simply do not want to do their own record keeping themselves, like the way we do things, appreciate that we maintain local offices for personal service, and know that they can trust us to do the job correctly. We have investors who range from are highly experienced to those who would prefer to do something else on the weekend. They know that we are knowledgeable about IRS rules and regulations and monitor accounts for potential prohibited transactions. Our customers also appreciate the educational offerings that we make available. So like any service, the decision is yours.

But with any service, you want to know if the provider is doing things correctly. The self-directed industry is a highly regulated business that must comply to with specific rules and requirements. So let’s start by looking at banks and the custodial services that they offer.

Banks are established by national or state charters that they must adhere to. The Internal Revenue Code specifically permits banks and trust companies to act as trustees or custodians of Individual Retirement Arrangements (IRAs). The code also allows for non-bank trustees. The IRS requires that banks, trust companies, and non-bank trustees be audited regularly for regulatory compliance. The IRS does not perform the actual examination of companies; it’s usually a state agency. I was such an auditor and examiner as well as a general auditor for a multi-bank holding company for some years.

Both PENSCO Trust Company and ours, International Bank and Trust (IB&T), are chartered as non-depository trust companies by the State of New Hampshire. We operate under the same state laws and regulatory oversight. By law, all of our clients’ funds are not deposited in our own trust companies, but in third-party banks until the client directs the purchase of a specific asset.

You know your money has a degree of security in a bank because it must comply with regulations and is subject to regular audits from state or federal agencies. For example, if you deposit money into your checking account at your bank’s branch office, the bank adds it to the pool of funds acquired from all of its customers at other branches. If you withdraw funds, the bank takes it from the pool. Pooling funds is how the banking and financial industry works.

So why is English concerned about administrators pooling funds at custodial banks? Pooling is two of his three reasons to not have administrators process your  IRA transactions. It baffles me, because it’s no different from the rest of the industry. At IB&T, all  client deposits are handled like every non-depository trust company and bank must, including PENSCO. All uninvested funds are directly deposited into a pooled trust account at an FDIC-insured depository bank.

The Entrust Group uses a model similar to national banks. We have local offices that maintain clients in their region. Customers use the local services and can deposit their funds locally. Each branch office must, by law, comply withto all rules and regulations that apply to The Entrust Group as a whole. The custodian or the custodian’s record keeper and administrator keeps individual records for each IRA or qualified plan participant. There is no added liability, and no reason that it should take any longer than it takes to withdraw funds from a regular savings account.

But it is English’s third point, that administrators are not subject to regulatory demands, that is the most distressing.

For over 50 years, federal law has allowed banks and trust companies to hire third parties to perform services. Without this ability, the current check processing and debit and credit card system would not exist in its present form. Most of the first self-directed IRAs that were introduced in 1975 were record kept and administered by third-party record keepers and administrators. Banks and trust companies are required to ensure that all such third parties meet or exceed the same regulations under which the bank or trust company is regulated. In fact, regulators reserve the right to directly examine IRAs that are record kept and administered by third parties, such as The Entrust Group.

No regulator would allow any record keeper or custodian to continue to operate in an unsafe or unsound manner. In fact, FINRA, New Hampshire Banking department, FTC, SEC, and many other regulatory agencies have a duty to close any unsound institution that have the kinds of issues that are pointed out in English’s article.

And regulation and audits are crucial. The risk of an employee embezzling or diverting client funds from a bank or its holding company is no different for a service provider. Unfortunately, this is a part of any financial service or other business. In the financial services industry, the question is not “Does the risk exist?” but more aptly “How is the risk mitigated.”

The Entrust Group and IB&T maintain comprehensive policies and procedures governing business operatingbusiness-operating practices to mitigate these risks. The procedures are further strengthened and verified through a robust, independent internal audit program, employee background checks, bonding, and insurance. The Entrust Group and its custodians provide safety unparalleled in the industry, which is why we continue to maintain a strong and growing customer base for nearly 30 years.

Banks that act as custodians hire administrators such as The Entrust Group to provide extensive valuable services to their self-directed IRA clients because it’s less expensive. Using companies who specialize in these services is more efficient and usually offers better personalized service and a more knowledgeable staff. Again, the banking institution and any services that they use are regulated and audited.

As a final note, I was curious how English glossed over the concern of the SEC and FDIC regarding LLCs and the use of checkbook control for IRAs. Now here is an area that is fraught with abuse. The watchfulness stems from the fact that these LLCs have been used to launder money, hide funds offshore, and engage in prohibited transactions, either intentionally or accidentally.

In these economic times especially, no one wants to hear that their funds aren’t safe. So I’m concerned when English tries to fuel panic over an industry that is tightly regulated. Clearly, as the nation’s largest network of third-party record keepers, with 50,000 customers and growing, we offer services that meet our clients’ needs while protecting their assets. PENSCO and a few other custodians and record keepers/administrators offer a similar service using a different a model. One type of model might work better for you, but one is not less legal than the other. Do shop and compare, do seek to understand the differences, and don’t allow others to use fear tactics to scare you into information that is not correct.

If I have not answered your questions or concerns, feel free to email me personally for more information.  info@TheEntrustGroup.com