There have been several occasions over the years where a client of Midland Trust asks us questions about our self-directed IRA administration fees. In some cases, people question why we charge an administration fee at all. I mean, after all, Charles Schwab and most of the other securities brokerages do free IRA administration. Similarly, local banks administer your IRA for free, as well. However, there is one big difference between Midland and these other organizations. Midland does not sell any investments.
Banks are using your IRA money to loan out as mortgages. They aren’t charging you any administration fees, but they are only paying you 1 percent and loaning your money out for returns of 5-8 percent. Similarly, securities brokerages may not charge an administration fee, but they also only allow you to buy their products (i.e. stocks/mutual funds). Therefore, they are earning commissions each and every time you make a purchase. If it is a managed mutual fund, in many cases there are load fees built into the cost of the fund. So you are actually paying a management fee built right into the price per share. The average equity mutual fund charges around 1.3-1.5 percent as a management fee. There are many that charge between 4-8 percent as an additional load fee. There is no statistical correlation between high expense ratios and high returns as evidenced by the Securities and Exchange Commission’s website: “Higher expense funds do not, on average, perform better than lower expense funds.”
At Midland, we do not have the ability to loan your money out for higher returns. We also cannot earn commissions because we do not sell any investments. Our only source of revenue is a flat administration fee for the required record-keeping and the IRS / client reporting that we perform. In fact, if you compare our self-directed IRA administration fees with what you would be paying for an average stock fund, you might be pleasantly surprised. The average stock fund has an expense ratio of about 1.5 percent. That means for every $100,000, you are paying about $1,500 in fees. The average IRA at Midland IRA is about $95,000 and our average annual self-directed IRA administration fees are a flat $295. Even if the client had two assets valued at $50,000 each, they would be charged $590 annually for administration. This is still far less than the average stock fund expense.
The bottom line is that every product comes at a cost. The IRS requires that all IRA accounts be administered by a third party and unless that third party has alternate ways to earn revenue on your IRA funds, administration fees are inevitable. So, just assume you will be paying some of your hard earned money in either lower returns (bank IRAs), administration fees (self-directed IRAs), or commissions (brokerage IRAs). Unlike banks and brokerage houses who limit your choices, at least with Midland, you have the options to invest in what you want.
If you have any questions about self-directed IRA administration fees, contact us today and one of our representatives would be happy to help!