Retirement Security: Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets
Published: 2016-12-08T00:00:00

Fast Facts:
People who invest their retirement accounts in unconventional assets—such as real estate or virtual currency—may be placing their savings at risk.
Retirement accounts allowing such unconventional investments increase owners' responsibilities in ways they may not understand—and mistakes can trigger taxes and penalties. Moreover, account custodians may prematurely close an account or let valueless assets and fraud go undetected because they did not accurately determine the value of unconventional assets.
We recommended that IRS improve guidance for account owners with unconventional retirement assets and clarify how to annually value such assets.

Highlights:
section_title: Why GAO Did This Study
paragraphs: Federal law places few restrictions on the types of investments allowable in tax-favored retirement accounts, such as IRAs or employer-sponsored 401(k) plans. Recent federal and state investigations and litigation have raised questions as to whether investing in unconventional assets may jeopardize the accounts' tax-favored status, placing account owners' retirement security at risk. GAO was asked to examine issues related to the potential risks and responsibilities associated with investments in unconventional assets.
GAO examined: (1) what is known about the prevalence of accounts that invest in unconventional assets; (2) how these accounts are managed; and (3) what challenges are associated with administering these retirement accounts. GAO reviewed relevant federal laws, regulations, and guidance; analyzed data collected from the retirement industry; analyzed available industry documents; and reviewed 334 related consumer complaints collected from three federal agencies and two independent entities.
section_title: What GAO Found
paragraphs: Federal data collection efforts to date have captured little information on retirement accounts holding unconventional assets—such as real estate, precious metals, private equity, and virtual currency—making the prevalence of such accounts unknown. In tax year 2015, the Internal Revenue Service (IRS) began requiring that custodians or trustees of individual retirement accounts (IRA)—including banks or other institutions approved to hold account assets—report selected information on unconventional assets in their clients' accounts to IRS. As of November 2016, IRS plans to begin compiling the new IRA asset data in 2017, but has not specified when the new IRA asset data will be available for analysis. Seventeen of the 26 custodians, who GAO identified as allowing retirement accounts with unconventional assets and who participated in GAO's data collection effort, reported having nearly half a million of these accounts in their custody at the end of calendar year 2015. IRAs made up the vast majority of accounts and assets reported.
An IRA owner's decision to invest in unconventional assets can expand their role and responsibilities substantially. GAO's review of industry documents found that individuals wanting to invest in unconventional assets through their IRA generally agree to be responsible for overseeing the selection, management, and monitoring of account investments and shoulder the consequences of most decisions affecting their accounts. For example, owners of such accounts assume a fiduciary role, which makes them assume greater responsibility for overseeing the selection, management, and monitoring of account investments, and shoulder the consequences of most decisions affecting their accounts.
Current IRS guidance provides little information to help IRA owners understand their expanded responsibilities and potential challenges associated with investing in unconventional assets. Targeted IRS guidance for these IRA owners may help them navigate the potential compliance challenges associated with certain types of unconventional assets. For example, GAO found that some IRA owners can experience challenges in the following areas:
Monitoring for ongoing federal tax liability : IRA owners are not always aware of the need to monitor the gross income from certain unconventional assets in their accounts for ongoing federal tax liability. For example, IRA owners who invest in active businesses or debt-financed properties need to monitor their accounts for ongoing tax liability that must be paid from the IRA. Failure to do so can result in underpayment penalties.
Obtaining annual fair market valuations for nonpublicly traded assets : IRA owners investing in hard-to-value unconventional assets can face challenges meeting their responsibilities to provide updated fair market value information to their custodian to meet IRS's annual reporting requirement. Failure to provide an updated fair market value in a timely manner can result in a custodian prematurely distributing account assets to the owner at a fair market value that is not current, potentially incorrect, and which could lead to a loss of tax-favored status for their retirement savings.
section_title: What GAO Recommends
paragraphs: GAO is making three recommendations to the Commissioner of Internal Revenue to, among other things, improve guidance for account owners with unconventional assets on monitoring for ongoing federal tax liability and to clarify how to determine the fair market value of hard-to-value unconventional assets. IRS generally agreed with these recommendations.

section_title: Letter
paragraphs: Each year individuals saving for retirement in tax-favored retirement  accounts defer an estimated $100 billion in federal tax revenue. Federal  law places few restrictions on the types of investments allowable in these  tax-favored retirement accounts. Aside from a general prohibition on  investing retirement funds in life insurance or collectibles, individuals can  generally invest in a broad spectrum of assets. Many owners of  individual retirement accounts (IRA) and participants in 401(k) plans  invest in mutual funds comprising stocks, bonds, and cash (in part  because their IRA custodian or employer may limit their investment  options). Other individuals choose to invest a portion of their savings in  less conventional nonpublicly traded assets not commonly held in  retirement accounts, such as real estate, precious metals, and private  equity. To facilitate such “unconventional” investments, these account  owners often roll over, or transfer, their accumulated retirement savings  into a similar retirement account for which a custodian or employer allows  investment in such assets. Regardless of the types of investments held,  IRAs and 401(k) plans must adhere to specific rules governing tax- favored accounts, including limits on contributions and distributions, and  comply with various federal disclosure and reporting requirements.
Recent federal and state investigations and litigation have raised  questions as to whether the investment in unconventional assets in  retirement accounts may jeopardize these accounts’ tax-favored status  and place account owners’ retirement savings at risk. You asked us to  examine the potential compliance risks and responsibilities account  owners may assume when choosing to invest in unconventional assets.  This report examines:  1.  what is known about the prevalence of retirement accounts that invest  2.  how these accounts are managed, and  3.  what challenges, if any, are associated with the administration of  these types of retirement accounts.
We employed several diverse methodologies in developing our findings.  For all objectives, we interviewed a range of federal and state regulators,  industry stakeholders, and participant advocates; reviewed relevant  federal laws, regulations, and guidance; and consulted available  literature. To examine the prevalence of retirement accounts that invest in  unconventional assets, we compiled data from industry stakeholders, web  searches, and the literature to help us identify 26 custodians and 48 other  service providers with experience working with account owners in  establishing and managing such accounts. Next, to learn about the  number, type, and value of retirement accounts held under custody at the  end of calendar year 2015, we conducted a survey data collection effort  and obtained responses from 17 of the 26 custodians that we identified  from available sources. We focused our effort on custodians as they are  responsible for reporting annually the fair market value of each IRA under  custody to the Internal Revenue Service (IRS). The custodians who  provided information varied in terms of the number and value of accounts  they held, and the types of unconventional assets they allowed. To  examine how these retirement accounts are managed and any  associated challenges, we developed a follow-up set of questions for the  same 17 custodians and received responses from 10 of them. We also  developed a similar set of questions for the 48 service providers we  identified who provide administrative support for IRAs and solo 401(k)  plans, collecting information from 21 of them. To augment our  understanding of challenges associated with managing retirement  accounts invested in unconventional assets, we analyzed 334 complaints  filed with three federal agencies—the Department of Labor (DOL), the  Department of the Treasury’s Office of the Comptroller of the Currency  (OCC), and the Securities and Exchange Commission (SEC)—and two  independent organizations—the Financial Industry Regulatory Authority  (FINRA) and the Better Business Bureau. Our list of custodians and  service providers was used to query databases and identify complaints.  We analyzed the complaints, developed general categories of challenges  account owners faced, and conducted a two-step review process to  ensure proper categorization of each complaint. We did not confirm the  authenticity of these complaints or independently investigate any of the  allegations made, or collect information on the extent to which each  complaint was resolved. As part of developing challenge categories, we  also reviewed federal and state enforcement actions against entities  involved with these types of retirement accounts. Finally, we examined  industry websites, and collected and reviewed publicly available  documents, including application forms, fee disclosures, and custodial  trust account agreements used to establish an IRA. We determined that  the data obtained from these sources was sufficiently reliable for the  purposes of this report. For more information on the development of the  methodology used in this report, see appendix I.
We conducted this performance audit from August 2015 through  December 2016 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: In passing the Employee Retirement Income Security Act of 1974  (ERISA), Congress sought to encourage individuals to save for retirement  in tax-favored retirement arrangements. Traditionally, account owners  participating in these arrangements defer taxes on contributions to these  accounts up to certain statutory limits, and in general, contributions and  investment earnings on those contributions are not taxed as income until  the account owner withdraws them from the account. In addition,  account owners typically direct their investments and make decisions  regarding the purchase, sale, reinvestment, and withdrawal of  investments. Individuals saving for retirement in the United States  typically save through IRAs or an employer-sponsored plan, like a 401(k)  plan.
What Is a Solo 401(K) Plan?  While employer-sponsored plans generally  have multiple employees participating in their  plans, a solo 401(k) plan—also called an  individual 401(k), a one-participant plan, self- employed 401(k), or self-directed 401(k)  plan—are qualified retirement plans designed  for the self-employed or a small business  owner with no employees (beyond themselves  and their spouse). The Economic Growth and  Tax Relief Reconciliation Act of 2001 included  reforms that generally provided small  business owners with no employees and the  self-employed the same advantages of a  conventional 401(k) plan, such as employee  deferrals, loan features, and Roth  contributions. Solo 401(k) sponsors select  plan investment options and may contribute to  the plan both as plan sponsor and plan  participant up to a combined $54,000 per  account (or $60,000 if age 50 or older) in tax  year 2017. In addition, plan sponsors may  elect to maintain exclusive authority and  discretion to manage and control plan assets  without involving a third-party. to qualify for preferential tax treatment. The most common IRA types are:  (1) traditional IRAs (which allow eligible individuals to make tax-deductible  contributions and accumulate tax-deferred investment earnings); and (2)  Roth IRAs, (which allow eligible individuals to make after-tax contributions  and accumulate investment earnings tax-free).
401(k) plans have become the most common employer-sponsored  retirement savings vehicle in the United States. Created by the  Revenue Act of 1978, 401(k) plans typically allow participants to  specify the size of their contributions and direct those contributions, as  well as any made by their employer, to one or more investments  among the options that the employer has preselected as offering  effective diversification across broad asset classes. Investment  options generally include mutual funds, company stock, and money  market funds. DOL’s Employee Benefits Security Administration  (EBSA) is responsible for, among other things, administering and  enforcing the fiduciary, reporting, and disclosure provisions of Title I of  ERISA. Self-employed individuals or owners of small businesses with  no employees may sponsor a 401(k) plan, known as a solo 401(k)  plan. To set up a solo 401(k) plan, individuals must adopt a written  plan document, arrange a trust for the plan’s assets, develop a  recordkeeping system, and provide plan information to employees  eligible to participate. Solo 401(k) plan account owners can select the  plan’s investment options as plan sponsor and invest in these options  as the plan participant. (See sidebar for further description of solo  401(k) plans, the 401(k) plans we focus on in this report.)
The owner of a tax-deferred account cannot keep retirement funds in their  accounts indefinitely. When IRA owners or 401(k) plan participants reach  age 70½, they generally have to start taking annual payments—known as  required minimum distributions (RMD)—from their plan savings based on  their account balance and life expectancy. The distribution for the year  in which a participant turns 70½ must be made no later than April 1 of the  following calendar year and no later than December 31 for any other  subsequent year.
subsections: section_title: Investments
paragraphs: Account owners have wide latitude in the types of assets in which they  can invest and custodians can choose to limit which type of assets they  will allow. While some custodians generally limit investments to publicly  traded assets, other custodians allow investments in a range of  unconventional assets. (See table 1.)
section_title: Roles and Responsibilities
paragraphs: Under Title I of ERISA, fiduciaries of ERISA-covered plans, such as  conventional 401(k) plans, must carry out their responsibilities prudently  and solely in the interest of the account participants and beneficiaries.  For ERISA-covered plans, a fiduciary includes a person who has  discretionary control or authority over the management of an account,  including management over the account’s assets, or anyone who, for a  fee or other compensation, renders investment advice with respect to an  account. Among other duties, fiduciaries have a responsibility to select  and monitor investment options and service providers; report account  information to the federal government and to participants; and ensure that  the services provided to their account are necessary and that the cost of  those services is reasonable. Many actions needed to operate a  qualified retirement account involve fiduciary decisions, whether an  individual or plan hires someone to manage the plan or manages the  account themselves. However, unlike conventional 401(k) plans, solo  401(k) plans are generally not covered under Title I of ERISA, including  the fiduciary standards in Part 4, or subject to DOL oversight because  they are sponsored by employers that have no employees.
The IRC generally requires plans (including certain IRAs and 401(k)  plans) to hold plan assets in a trust fund maintained for the exclusive  benefit of employees and their beneficiaries. The IRC establishes the  requirements that a trust must satisfy in order to “qualify” for favorable tax  treatment. In some cases, both the employer and employee may  contribute to the trust. The assets are held in trust until distributed to the  employees or their beneficiaries according to the plan’s provisions.
Individuals who own a business or are self-employed can establish a  401(k) plan that allows unconventional assets, a solo 401(k) plan, either  on their own or by consulting a professional or financial institution—such  as a bank, mutual fund provider, or insurance company—to help them  establish and maintain the plan. Because solo 401(k) plans generally do  not have to comply with ERISA Title I, Part 4 fiduciary requirements, the  individual, as plan sponsor, may also serve as the plan fiduciary and  trustee.
Individuals can establish an IRA with a bank or qualified firm that acts as  a trustee or custodian of investments contributed by the individual or  purchased with funds contributed by the individual. A traditional IRA is  established after a custodial agreement (IRS Form 5305) is fully executed  by both the grantor (account owner) and the trustee (custodian). IRS  developed a model Form 5305 and permits custodians who use the form  to incorporate additional provisions as long as the provisions are agreed  to by the account owner and custodian, and comply with federal and state  requirements. These additional provisions typically outline the parties’  roles and responsibilities. Custodians are not required to use the model  form, and are instructed not to file it with IRS.  .
section_title: Reporting Requirements
paragraphs: IRA custodians have several reporting requirements with respect to IRA  investments. IRA custodians are required to submit annually a Form 5498  IRA Contribution Information to IRS for each IRA account under  custody. As part of this reporting, IRA custodians must ensure that all  IRA assets (including those not publicly traded) are valued annually at  their fair market value (FMV), and IRS requires custodians to report the  year-end aggregate FMV of all investments in an IRA. Starting with tax  year 2015, IRS required custodians to report the aggregate FMV of  investments falling in specified categories of unconventional assets and  to identify the category in which the assets belonged. Custodians are also  required to submit Form 1099-R Distributions From Pensions, Annuities,  Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., each  year that an IRA withdrawal took place and detail the total distributions  from the account during the calendar year. Form 1099-R also provides  information about the IRA distributions, such as whether the distributions  were taken before age 59½.
A 401(k) plan’s annual reporting requirements are generally satisfied  through filing a Form 5500 Annual Return/Report of Employee Benefit  Plan (Form 5500) and its accompanying schedules. The Form 5500 is  the primary source of information collected by the federal government  regarding the operation, funding, expenses, and investments of employee  benefit plans. The Form 5500 reporting requirements vary depending on  the size and type of plan: plan sponsors required to submit the long form  must fill out multiple schedules and attachments that collect information  on particular aspects of the plan, such as the value and types of plan  assets; plans allowed to complete the short form have fewer reporting  requirements.
section_title: Prohibited Transactions
paragraphs: IRA owners and 401(k) plans are not permitted to engage in certain  prohibited transactions. Prohibited transactions generally fall into two  categories:  Involving disqualified persons. An IRA owner and 401(k) plan are  prohibited from engaging in a transaction with a range of entities,  including a fiduciary, a person providing services, or members of the  IRA owner’s family, including a spouse, ancestor, or descendant.
Involving self-dealing. An IRA owner and 401(k) plan fiduciary are  prohibited from engaging in a transaction where the account owner or  the fiduciary benefits from the asset prior to retirement.
Unlike a 401(k) plan sponsor, who has an opportunity to voluntarily  correct some prohibited transactions after they occur, IRA owners face  adverse tax consequences when engaging in a prohibited transaction.  Examples of a prohibited transaction in an IRA may include: (1) directing  the IRA to purchase a vacation home as a rental property for personal  use; (2) selling their own property to the IRA; and (3) taking a salary from  an IRA-funded business. Specifically, if the IRA owner engages in a  prohibited transaction, the IRA loses its tax-favored status as an IRA, and  the account is treated as distributing all of its assets to the IRA owner at  the FMV on the first day of the year in which the transaction occurred.  The IRA owner may also be subject to a 10 percent additional tax on  early distributions unless an exception applies.
section_title: Tax Liability in Retirement Accounts
paragraphs: Earnings and profits made in tax-favored savings vehicles are generally  reinvested in the account with taxes deferred until distribution. However,  two circumstances can generate current tax liability for retirement account  owners:
Unrelated Business Taxable Income (UBTI): Unrelated business  taxable income is gross income generated from an ongoing trade or  business (less allowable deductions) that is not related to the exempt  or tax-deferred entity, such as an IRA. An IRA or 401(k) plan that  earns $1,000 or more of gross income from an unrelated business  must file Form 990-T with IRS and pay related taxes.
Unrelated Debt-Financed Income (UDFI): Unrelated debt-financed  income is a form of UBTI. If an asset purchased by an IRA is debt- financed (e.g., a mortgage on a rental property), income produced by  that asset could be subject to taxes.
section_title: Regulatory Framework
paragraphs: Multiple federal, state, and independent entities provide regulatory  oversight for retirement accounts invested in unconventional assets,  although agency jurisdiction varies depending on the type of provider, the  state in which it conducts business, and type of plan offered. Table 2  provides a summary of the regulatory activities of some of the major  entities involved in overseeing these accounts.
section_title: Full Extent of Retirement Account Investment in Unconventional Assets Is Unknown, but Custodians Reported Nearly Half a Million Accounts Invested in Unconventional Assets in 2015
subsections: section_title: Federal Government Collects Limited Data on Unconventional Asset Holdings in Retirement Accounts
paragraphs: To date, federal data collection efforts capture limited information on the  unconventional asset holdings in IRAs and solo 401(k) plans, making  their overall prevalence unknown. Historically, IRS has not collected FMV  data specific to unconventional asset holdings in IRAs. For tax year 2015,  IRS began requiring IRA custodians to report selected information on  unconventional asset holdings in IRAs. IRS did not fund electronic  compilation for the 2015 data but plans to electronically compile data for  tax year 2016 that will be filed in 2017. As of November 2016, IRS has  not provided a date on when the new IRA asset type data will be available  for further analysis. While estimates have been reported in recent years  regarding the aggregate investment in IRAs that may hold unconventional  assets, we could not determine the validity of these estimates based on  the sources of data used to support them. In addition, DOL collects no  data on unconventional asset holdings in solo 401(k) plans because  sponsors of solo 401(k) plans are generally not required to report their  investment holdings. As a result, federal data collection on  unconventional assets is incomplete and unspecific with respect to the  types of assets held in these accounts. (See table 3.)
section_title: Custodians Report Nearly Half a Million Retirement Accounts Are Invested in Unconventional Assets
paragraphs: Seventeen of the 26 custodians we identified who allow investment in  unconventional assets reported holding an aggregate of more than  488,000 retirement accounts at the end of calendar year 2015.  Custodians reported that owners of these retirement accounts invested in  a range of unconventional asset types and identified real estate, private  equity, and hedge funds as the most common asset types held in these  accounts. In addition, they reported that account owners invested in  Limited Liability Companies (LLC) and limited partnerships, precious  metals, promissory notes, church bonds, and private placements.  Custodians also reported that these accounts have an aggregate value of  approximately $50 billion; however, we could not determine whether the  accounts exclusively held unconventional assets or, if not, which portion  was attributable to cash or publicly traded assets held in the accounts.
IRAs made up the vast majority of accounts and assets reported, and  solo 401(k) plans constitute less than 1 percent of reported accounts and  assets. (See table 4.)
The aggregate data that custodians provided help establish a baseline of  retirement account investment in unconventional assets, but these data  are not comprehensive in that they exclude several other potential  sources of such investment. For example, industry representatives stated  that other banks, trust companies, and financial service providers may  accommodate investments in unconventional assets, such as commercial  real estate, for their high net worth clients. Additionally, some individuals  with 401(k) plans who invest in unconventional assets serve as plan  trustee and would not need to retain the services of a custodian to  process account transactions. Therefore, it is likely that the total number  of accounts invested in unconventional assets would be higher.
section_title: Retirement Account Owners Investing in Unconventional Assets Are Responsible for Account Management and Compliance
paragraphs: Transferring existing retirement savings to a new account or plan that  allows investment in unconventional assets expands the roles and  responsibilities of account owners for managing aspects of their  accounts. Many individuals seeking to set up a new account may be  accustomed to tax-favored status for their IRA or 401(k) plan, but their  decision to invest in unconventional assets is accompanied by a range of  responsibilities that may be new and unfamiliar. For example, all 20  custodial agreements we reviewed required individuals to agree to be  responsible for directing their investments; and oversee the selection,  management, monitoring, and retention of all investments in the account.  In addition, while account owners may seek the assistance of  knowledgeable third parties, such as attorneys, accountants, tax advisors,  and financial planners, the account owners bear the consequences of any  mistakes made in managing their accounts. According to DOL, IRA and  401(k) plan investors often lack investment expertise and must rely on  experts, but are unqualified to assess the quality of the expert’s advice or  guard against its conflicts of interest. Moreover, DOL notes that many of  these experts often receive fees (or other forms of compensation) that  may introduce conflicts of interest between them and the plan officials,  plan participants, and the IRA investors they advise.
Selecting an Appropriate Account Type. Individuals seeking to save for  retirement by investing in unconventional assets must first determine  which type of retirement savings vehicle and investment aligns with their  savings goals. Nine of 17 custodians reported that clients want to invest  in unconventional assets for a variety of reasons, including avoiding the  stock market, diversifying retirement portfolios, investing in a tangible or  familiar asset, or investing in a company not yet publicly traded. One  custodian said that most individuals seeking investment in unconventional  assets did not own their own businesses, and that it was more common  for these individuals to establish an IRA with a custodian that allowed this  kind of investment. Self-employed individuals or owners of small  businesses who employ no other full-time employees may qualify to  sponsor a solo 401(k) plan. Two service providers who advise their clients  on creating solo 401(k) plans to invest in unconventional assets said that  their clients preferred the 401(k) plan for its higher annual contribution  limits and the ability to take participant loans.
Establishing and Funding an Account. An individual must take several  steps to establish and fund an account that allows investment in  unconventional assets. First, individuals opening an IRA must find a  custodian willing to administer the asset. Eighteen of the 21 service  providers reported that in their experience most individuals wanting to set  up an account had a specific investment or asset type in mind before  making initial contact with them. Twelve of the 17 custodians reported  that they placed some restriction on the types of unconventional assets  that they would allow. For example, they reported that they did not allow  investment in certain assets, including foreign-based assets, precious  metals, person-to-person promissory notes, or single-member LLCs. One  custodian noted that such restrictions were necessary because some  assets were administratively infeasible for its business plan. For example,  a custodian who does not specialize in foreign-based assets may not  accept custody of these types of assets. Second, prospective IRA owners  must sign a custodial agreement that outlines the respective roles and  responsibilities of the account owner and custodian over the lifecycle of  an account. Our analysis of agreements available on 20 custodians’  websites found that 18 custodians used IRS’s model custodial agreement  to help IRAs conform to IRS requirements. The model agreement  includes several articles that IRS has approved regarding contribution  limits, prohibited assets, RMDs, and the treatment of beneficiaries,  among other things. The agreement also provides custodians with an  opportunity to amend the form with additional provisions as long as these  provisions comply with applicable requirements of federal and state law.  Third, the individual must authorize the custodian to fund the new account  either through a new contribution, or through a transfer or rollover of  funds from another qualified retirement account.
Purchasing Assets. The choice to purchase unconventional assets rather  than publicly traded stocks and bonds in a retirement account marks a  significant shift in the balance in account management responsibilities  toward the account owner. On the one hand, solo 401(k) account owners  sponsor the plan and can serve as its trustee, allowing them to purchase  any asset permissible in the plan documents and deposit the asset in  their designated trustee account. On the other hand, IRA owners  investing in unconventional assets must locate an asset, determine its  suitability for their retirement goals, and conduct due diligence on the  investment and the investment sponsor. In addition, to finalize the  purchase, these IRA owners must collect, review, and prepare all  purchase documents and provide them to the custodian to execute the  purchase on behalf of the IRA. IRA owners and custodians must  complete this sequence of tasks each time an asset is placed in the  account. (See table 5.)
The amount and type of documentation that account owners must provide  to custodians before an asset can be purchased can vary considerably  depending on the type of asset being purchased. Our analysis of  custodian documentation found that assets like promissory notes or  precious metals require minimal documentation from the account owner,  while other assets, such as real estate or private equity, can require the  account owner to provide considerable documentation before a purchase  can be made. Depending on the asset type selected, an account owner  may have to expend considerable time and effort to finalize an asset  purchase. (See table 6.)
Some IRA owners may choose to exercise greater control and limit a  custodian’s direct involvement in the purchase of unconventional assets  by adding a checkbook control feature to their IRA. In order to obtain  checkbook control, the account owner must first establish an LLC that is  owned by the IRA. Once this new LLC is established, a business  checking account linked to IRA funds is set up, and account owners are  named manager of the LLC with control of the checkbook. Using the  checkbook owned by the IRA’s LLC, the account owner can take  advantage of time-sensitive offers and purchase assets directly from  investment sponsors without having to wait for a custodian to execute a  purchase or sale.
Account Management and Compliance. Account owners who invest in  unconventional assets typically agree to become responsible for the day- to-day management of their accounts and ensuring that the account  remains compliant with laws and regulations, according to our review of  selected custodial agreements. As an IRA custodian can only act on the  direction of the account owner, an account owner generally must inform  the custodian of the many tasks needed to maintain assets in their  account—such as purchases, sales, earned income, payments due,  requested distributions, and changes in the account’s value—and provide  sufficient documentation to the custodian to facilitate each account  transaction on their behalf. (See table 7.)
The extent of custodian involvement in the ongoing management of an  account can depend on the types of unconventional assets held in the  account. For example, one custodian mentioned that promissory notes  that promised a balloon payment of principal and interest at the end of a  specified term generally required less recordkeeping from the custodian.  The same custodian and another described the management of a real  estate holding in an IRA as being a labor-intensive, manual process. In  this case, a custodian would coordinate with the account owner to pay all  expenses from IRA funds, such as maintenance, improvements, property  taxes, condominium association fees, general bills, and insurance, and  return any related income to the IRA.
Account owners need to be mindful of fees and expenses associated with  plan investments and services to determine whether they continue to be  reasonable in light of the services provided. Given that retirement  accounts must be held in trust, IRA custodians generally charge a range  of administrative and transactional fees for the services they provide  throughout the lifecycle of an IRA. While some transactions like precious  metal storage lend themselves to a flat fee, other transactions like real  estate purchases can involve multiple transactions requiring greater  involvement by a custodian, leading to a higher incidence of fees that  must be paid out of the account. In reviewing fee disclosures from  custodians who made them publicly available on their websites, we found  that custodians generally charged fees for similar services—account  establishment, account maintenance, transactional fees, and account  termination—but the type of fee structure used and amounts of fees  charged varied among custodians. Custodians’ fee structures generally  included a (1) flat fee; (2) a per-asset fee in an account; or (3) a fee  based on a percentage of an account’s value. Some fee structures  consisted of multiple categories, such as a flat fee plus a per-asset fee.  The fee structure used can affect annual account costs, as shown in table  8.
Finally, one fee disclosure we reviewed reminded account owners of their  responsibility to monitor their accounts, noting that unfunded accounts  and accounts with zero value would continue to incur fees until the  account owner provided written instruction to close the account.
IRA owners with checkbook control can perform some tasks associated  with maintaining the account without a custodian’s assistance and thus  avoid some of the custodian’s administrative and transaction fees related  to these services. For example, an IRA owner, as manager of the LLC  owned by the IRA, can manage several administrative services  associated with rental real estate in an IRA, such as paying property  taxes, insurance premiums, and utility bills, and writing checks from the  LLC bank account to cover property repairs and maintenance. However,  whether using a custodian or not, the account owner, in signing a  custodial agreement, agrees to be responsible for ensuring that  transactions do not run afoul of the prohibited transaction rules and for  determining whether transactions constitute contributions to or  distributions from the IRA.
Closing an Account and Distributing Assets. As with purchasing assets  and maintaining an account on an ongoing basis, account owners  investing in unconventional assets are responsible for overseeing the  distribution of assets from their accounts, such as determining the amount  of any RMD and directing custodians to release the funds. Whether  seeking to liquidate the assets in an account, take physical possession of  the assets, or transfer assets to another custodian, account owners must  direct the custodian to facilitate the removal or transfer of assets from the  IRA.
Distribution of assets. Either the account owner or the custodian can  initiate a distribution of account assets. Account owners can submit a  distribution request to the custodian. The custodian follows the  account owner’s directions to distribute account assets to the account  owner either in cash or other in-kind distribution. In the case of an in- kind distribution of assets, the custodian may ask the account owner  to provide an updated FMV for the assets before completing the  distribution. A custodian can also initiate a distribution of account  assets for a variety of reasons, including engaging in a prohibited  transaction or nonpayment of fees, The custodian must report  distributions to IRS and the account owner on Form 1099-R.
Custodian-to-custodian transfer. The account owner can establish a  new account with another custodian and authorize a transfer of assets  from the old account to the new account. The new custodian works  with the account owner to re-title illiquid assets in the name of the new  account and forwards the transfer request to the current custodian for  execution. The original custodian confirms that all fees and expenses  have been paid and illiquid assets are properly re-titled; and transfers  the assets to the new custodian. Custodians are generally not  required to report such transfers between IRAs to IRS or to account  owners on Form 1099-R.
Some custodial agreements contain provisions that a custodian may  initiate a distribution of unconventional assets to the account owner (or  transfer assets to another custodian) without an account owner’s consent.  When this occurs, the custodian notifies an account owner of the  custodian’s intent to resign and terminate an account, and generally gives  the account owner 30 days to exercise their right either to request a lump  sum distribution or to name a new custodian to initiate an in-kind transfer.  If the account owner does not name a new custodian, the custodian can  transfer the assets in-kind to another custodian of their choosing or  distribute the account’s assets to the account owner. If distributed to the  account owner, the custodian must report the distribution to IRS and  provide a Form 1099-R to the account owner.
section_title: IRA Owners with Unconventional Assets Can Face Challenges with Tax Liability, Valuation, and Distribution, and IRS Provides Limited Guidance to Assist Them
subsections: section_title: Certain IRA Transactions Can Trigger Loss of Tax- Favored Status or Generate Immediate Tax Liability
subsections: section_title: Loss of Tax-Favored Status
paragraphs: IRA owners who invest in unconventional assets take on a heightened  risk of engaging in a prohibited transaction and losing tax-favored status  for their retirement savings. IRS officials stated that prohibited  transactions are the most prominent compliance risk associated with  investing IRA savings in unconventional assets. Prohibited transactions  are more likely to arise with investments in promissory notes, private  equity, and real estate because—unlike publicly traded stocks, bonds,  and mutual funds—these investments can involve disqualified family  members or other disqualified persons. Similarly, IRA investments in  rental real estate, with its many transactions, for example, can leave IRA  owners susceptible to a number of prohibited transactions, any one of  which would result in the loss of the IRA’s tax-favored status, as shown in  figure 1.
Some custodians can serve as gatekeepers for obvious prohibited  transactions, such as an IRA owner purchasing his own property for the  IRA, though account owners must navigate the IRA tax laws and can face  additional taxes for noncompliance. Account owners who invest in an LLC  inside an IRA with a checkbook control feature, which limits custodial  involvement in transactions, also take on a heightened risk of engaging in  a prohibited transaction and losing their IRA’s tax-favored status.  Checkbook control may offer IRA owners additional conveniences and  reduce transaction fees charged by custodians, but these IRA owners  must closely monitor each action for prohibited transactions. For example,  IRA owners with checkbook control may pay IRA expenses directly  without submitting requests through a custodian; however they must  avoid paying IRA expenses with personal funds, such as writing a check  from a personal account rather than from their IRA checkbook, or making  payments to themselves or another disqualified person. Six of 17  custodians said that they did not offer IRAs with checkbook control due to  the lack of custodian oversight for prohibited transactions, among other  things.
section_title: Unforeseen Federal Tax Liability
paragraphs: Earnings and profits made in tax-deferred savings vehicles generally get  reinvested in the account without generating current federal tax liability,  but investments in certain unconventional assets can generate ongoing  tax liability for IRA owners. Certain investments can generate current  tax liability from UBTI or UDFI earned in retirement accounts. Examples  include using an IRA to invest in an active business or using debt to  finance a portion of an asset’s purchase. (See fig 2.)
IRA custodians need to monitor IRA investments for UBTI and pay any  applicable taxes from the IRA, but we found custodians often delegated  the responsibility for monitoring for tax liability to the account owner. IRS  requires custodians of IRAs subject to these requirements to file a Form  990-T for any UBTI of $1,000 or more. Most custodial agreements we  reviewed required account owners to agree to monitor their IRA for  business income; however, two service providers told us IRA owners  familiar with investing in more conventional assets that do not generate  business taxable income may not realize that the responsibility to monitor  continues as long as the asset remains in the IRA.
Having to pay taxes from the IRA can pose additional challenges for  account owners who invest in illiquid assets that cannot easily be sold to  pay applicable taxes. First, illiquid unconventional assets, such as real  estate, private equity, and promissory notes, may require account owners  to find another investor to purchase their interest in the asset. Second,  the account owner cannot pay the taxes with personal funds (a prohibited  transaction) and must arrange to have a custodian pay the taxes from  their IRA. Third, two service providers stated that IRA owners may not  realize that once a retirement investment generates UBTI or UDFI, taxes  must be estimated and paid quarterly if the tax is expected to be $500 or  more, necessitating a certain level of liquidity to be maintained in the  account.
section_title: Difficulty Obtaining Fair Market Value for Hard-to- Value Assets Can Heighten the Risk of IRA Noncompliance and Fraud
paragraphs: IRA owners who invest in unconventional assets may face challenges  meeting their responsibilities to provide updated FMV information to their  custodian to meet IRS’s annual FMV reporting requirement because  some unconventional assets are inherently hard to value. Some  unconventional assets, such as precious metals, have a readily available  FMV; other assets, such as undeveloped land and private equity, may  require IRA owners to obtain a third-party appraisal or rely on investment  sponsors to provide the information. Many of the custodial agreements  we reviewed made IRA owners responsible for obtaining and providing a  year-end FMV of unconventional assets in their accounts to the custodian  each year. However, some custodians contact the investment sponsor  directly to obtain an updated FMV, and if unsuccessful, may report the  last-known FMV or the original purchase price. As a result, the FMV  reported to IRS may not reflect a nonpublicly traded asset’s current value.  IRA owners who fail to provide updated FMV to their custodian within a  specified time limit run the risk of their custodian distributing their assets  from the IRA, which could lead to a loss of the account’s tax-favored  status if the owner cannot identify a successor custodian willing to hold  the assets. (See fig. 3.)
Even though the last-known FMV that the custodian reports to IRS may  not necessarily reflect the current estimated value of an asset, it can be  treated as an asset’s true value and result in federal tax consequences  for IRA owners. For example, the last-known FMV can be used to  calculate federal tax liability for IRA owners: when calculating RMDs; when determining the distribution amount in the event the IRA  engages in a prohibited transaction; and when reporting an in-kind distribution in the event a custodian resigns  an account (e.g., IRA owner fails to pay custodial fees or to provide  updated FMV).
Distributions of assets at their last-known FMV can be especially  damaging if the asset distributed is found to be valueless and/or an  updated FMV is unattainable. Once a distribution is made from an  account, the value of that distribution—even if based on a last-known  FMV—becomes the value used to determine the account owner’s federal  tax liability. IRS identifies noncompliance with IRA distribution rules  through automated matching of custodians’ Form 5498 and Form 1099-R  returns with taxpayers’ income tax returns. According to an IRS official, if  a Form 1099-R incorrectly reported a distribution of a worthless asset as  a distribution of a valuable asset, the individual receiving the incorrect  distribution would be responsible for proving that the asset was worthless.  The official further noted that, to remain compliant, the taxpayer could pay  the tax due and subsequently file a claim for a refund, or report the  depreciation of the distributed asset’s value on an annual income tax  filing. Our review of consumer complaints found several examples of a  custodian’s decision to report the last-known FMV creating tax  consequences for account owners, as shown in table 9.
Custodians provided information to account owners through custodial  agreements and other forms on owner responsibilities for providing FMV  information for unconventional assets and supporting documentation to  the custodian. For example, thirteen of the 20 custodial agreements we  reviewed included custodian-specific policies informing account owners of  their responsibilities to comply with IRS’s annual FMV reporting  requirements. We found a range of policies, varying by asset type and  custodian, for the FMV information that would be reported to the IRS and  for when account owners needed to obtain independent appraisals to  substantiate an asset’s FMV. For example, some of these agreements  and other custodian forms:  required IRA owners to obtain independent property appraisals for  real estate investments at least once every 3 years;  required IRA owners to obtain an annual comparative market analysis  for real estate investments;  collected FMV information directly from investment sponsors and  other third-parties for certain assets, such as limited liability  companies, limited partnerships, and hedge funds; and  reported the purchase price for other assets, such as promissory  notes.
However, some custodians also stated that requiring independent  appraisals in years without a taxable event, such as a distribution, could  be costly for account owners and discourage investments in certain types  of assets.
The difficulty with obtaining and verifying FMV of certain unconventional  assets can expose account owners to fraud and allow losses in value to  remain undetected in retirement accounts for some time, eroding IRA  owners’ retirement savings. In 2011 SEC’s Office of Investor Education  and Advocacy and the North American Security Administrators  Association (NASAA) issued a joint investor alert warning investors that  money held in accounts that allow investments in unconventional assets  presented attractive targets for fraud promoters seeking to engage in  fraudulent conduct. The alert included multiple examples of SEC and  state enforcement cases that involved fraudulent schemes associated  with IRAs that allow investments in unconventional assets. SEC officials  said that even though the prevalence of accounts holding unconventional  assets cannot be readily determined, the potential for fraud in these  accounts remained high and that concrete examples of fraud involving  these accounts have been, and continue to be, well documented. Three  state securities administrators said complaints from account owners were  often filed years after an account had lost value because these owners  believed the periodic account statements sent by the custodian were  correct. For example, if custodians, and in turn account owners, rely on  the purchase price of a promissory note as an annual FMV, they may not  realize when a borrower has filed for bankruptcy and thereby be unable to  pay back the note. Similarly, according to the three state securities  administrators, investment sponsors may report incorrect FMV  information to custodians to perpetrate fraud. Finally, some account  owners appeared to misunderstand the custodian’s responsibility to report  annual FMV as a form of verification, leaving these account owners open  to holding potentially fraudulent assets in their accounts. (See table 10.)
section_title: Some Unconventional Assets Are Difficult to Distribute as Retirement Income
paragraphs: Account owners may also face challenges when trying to liquidate certain  unconventional assets to distribute as retirement income. Unlike publicly  traded assets, which can be purchased and sold with relative ease in  retirement accounts, account owners may experience difficulty finding a  secondary market in which to sell certain unconventional assets. For  example, account owners trying to liquidate a private equity investment  must find other investors willing to purchase the asset. (See table 11.)
Account owners who have difficulty liquidating unconventional assets may  instead be required to accept in-kind distributions rather than cash to  comply with the minimum distribution requirements. For example, an  account owner invested in real estate may need to request that a  custodian distribute a percentage of the property equivalent to their  calculated annual RMD. In such a case, that individual would own an  illiquid portion of the property personally while the account would own the  rest. The account owner in this scenario would not be able to receive a  cash distribution to use as retirement income, yet would be responsible  for paying applicable income taxes on the in-kind distribution.
section_title: IRS Provides Limited Guidance to Account Owners Who Invest Their Retirement Savings in Unconventional Assets
paragraphs: Current IRS guidance provides little information to help IRA owners  understand their expanded responsibilities and potential challenges  associated with investing in unconventional assets. For example, in our  review of complaint data, some account owners appeared to  misunderstand their responsibilities documented in the custodial  agreements, and expected their custodian to provide due diligence,  monitor investments, or compensate them for investment losses. (See  table 12.)
Federal internal control standards require agencies to communicate  effectively with external stakeholders to help achieve agency goals.  IRS’s Taxpayer Bill of Rights states that taxpayers have the right to know  what they need to do to comply with the tax laws, and are entitled to clear  explanations of the laws and IRS procedures in all tax forms, instructions,  publications, notices, and correspondence. In addition, IRS’s strategic  plan states that IRS guidance should help taxpayers understand their tax  responsibilities through targeted outreach, communications, and  education. We previously recommended that IRS outreach and  education explicitly target the risk of noncompliance for IRA owners  investing in unconventional assets.
We found three areas, in particular, where IRS guidance lacks specific  information for account owners investing in unconventional assets:
Prohibited transactions. IRS officials said that engaging in prohibited  transactions is the most prominent compliance risk associated with  investing IRA savings in unconventional assets, but IRS has not yet  compiled data to help provide targeted outreach to IRA owners who  invest in unconventional assets. In 2014, we recommended that  IRS: (1) add an explicit caution in Publication 590 for taxpayers about  the potential risk of engaging in a prohibited transaction when  investing in unconventional assets; and (2) identify options to provide  targeted outreach to taxpayers with unconventional IRA assets and  their custodians to help them avoid losing their IRA tax-favored status  by engaging in a prohibited transaction. In 2015, IRS added an explicit  caution to IRA owners in Publications 590-A and 590-B about the  heightened risk of engaging in a prohibited transaction, but has not  compiled the data to help provide targeted outreach. IRS said it  could refine its outreach to those taxpayers with nonpublic IRA assets  using the new asset type data once compiled electronically. Unless  IRS augments outreach based on reliable data about unconventional  IRA investments, these taxpayers at greater risk may not be able to  ensure compliance with rules on prohibited transactions. Four service  providers told us that additional guidance would help IRA owners  investing in unconventional assets understand the risks for prohibited  transactions.
Unrelated business taxable income. IRA owners unfamiliar with  monitoring their investments for UBTI have limited guidance to assist  them in identifying and calculating their tax liability. IRS Publications  590-A and 590-B, which together serve as a general IRA handbook  for IRA owners, make no mention of UBTI or its tax consequences for  IRAs. IRS Publication 598 -Tax on Unrelated Business Income of  Exempt Organizations lists IRAs as one of many exempt entities  subject to UBTI, and provides detailed examples of how to calculate  UBTI and file tax forms. However, the publication does not provide  specific examples of how IRA investments in unconventional assets  can generate UBTI. An IRS official said that the IRAs subject to UBTI  represented a small percentage of 990-T filers, and that neither the  frequency nor consequences of noncompliance met the threshold for  including specific IRA-related content in the IRA and UBTI guidance.  However, without an explicit caution or guidance from IRS, account  owners may inadvertently invest in assets that require additional  monitoring and filing obligations; failure to meet these obligations may  subject account owners to underpayment penalties.
Fair market value. Current IRS guidance includes no guidance or  advice to custodians or IRA owners regarding how to determine the  FMV for unconventional assets held in retirement plans. An IRS  official stated that FMV is a commonly understood term and that many  professional appraisal companies could provide an unbiased value for  any IRA asset. However, 9 of the 17 custodians reported challenges  obtaining FMV information, such as from nonresponsive account  owners or investment sponsors, or in obtaining adequate supporting  documentation. Further, securities administrators in one state said  that guidance could be improved to indicate to custodians the type of  information that they should rely on for substantiating FMV. In  addition, three service providers said that account owners needed  clearer guidance on FMV reporting, such as the types of information  that would fulfill the requirements.
subsections: section_title: Custodial Agreements That Follow the Model Form May Be Confusing
paragraphs: The inclusion of language from the IRS model form that a custodial  agreement has been “pre-approved by the IRS” and the ability for  custodians to amend the IRS model form may mislead account owners  into thinking that IRS has reviewed and approved the entirety of the  document they sign. Fifteen of the 20 custodial agreements we  reviewed retained language from the IRS model form stating that the  agreement had been “pre-approved by the IRS,” but an IRS official said  that the agency does not receive, review, or approve custodial  agreements. In fact, the model form instructs IRA owners and custodians  not to file the form with IRS. In addition, 16 of the agreements  resembled an IRS form, which may further lead account owners to  believe that the provisions contained within the form had been verified by  IRS. For example, these agreements included the IRS form number, an  IRC section reference, and the IRS 2002 revision date for the model form  at the top of the first page. Lastly, we found that all 20 of the custodians  amended the form to include multiple provisions designed to protect the  custodian. For example, some of these added provisions include: performing no due diligence on the investment and the investment  indemnifying the custodian of responsibility for sharing known  information on troubled assets with account owners;  reserving the right to liquidate IRA assets of the custodian’s choosing;  and employing and paying agents, attorneys, and accountants with IRA  funds for any purpose deemed necessary.
The amended form may cause confusion on the part of IRA owners. For  example, IRA owners may not be able to differentiate between the model  IRS language and terms and conditions added by custodians. IRA owners  may also read the “pre-approved by the IRS” statement and assume that  the IRS has vetted the provisions added by custodians.
section_title: Conclusions
paragraphs: With few restrictions on the types of assets that can be held in an IRA or  a solo 401(k) plan, individuals can invest their retirement savings in an  increasingly diverse range of unconventional assets—some of which may  not have been imagined as retirement plan assets when the first IRAs or  solo 401(k) plans came on the market. Unconventional assets, such as  virtual currency and unsecured promissory notes, when placed in  retirement accounts introduce different kinds of risk to account owners,  and can have potential federal tax implications. These risks are  particularly high for older workers nearing retirement who transfer savings  accumulated over the course of their careers to establish new retirement  accounts that allow investments in certain assets that they may not fully  understand and may expand their responsibilities. IRS has published  detailed guidance to assist account owners with directing their retirement  investments, but this guidance has not kept pace with changes in  investment options. As a result, account owners who take on  responsibility for accounts invested in unconventional assets must rely on  guidance better suited for investments in more conventional assets— publicly traded stocks, bonds, and mutual funds—which are often  professionally managed. As account owners consider investing in  unconventional assets, they should have a clear understanding of what is  required to manage such investments in a retirement account, ensure  proper valuation and tax reporting, and navigate a complex set of rules  that govern tax-favored retirement investments. The consequences for  account owners who make a mistake can be severe and jeopardize a  lifetime of retirement savings.
section_title: Recommendations for Executive Action
paragraphs: To assist IRA owners in addressing challenges associated with investing  their retirement savings in unconventional assets, we recommend that the  Commissioner of Internal Revenue take the following three actions:
Provide guidance to IRA owners on the potential for IRA transactions  involving certain unconventional assets to generate unrelated  business taxable income subject to taxation in the current tax year  and subsequent years. For example, IRS could consider adding an  explicit caution in Publication 590 Individual Retirement Arrangements  (IRAs) and include a link in Publication 590 to Publication 598 Tax on  Unrelated Business Income of Exempt Organizations to provide  examples demonstrating how certain unconventional assets in IRAs  can generate unrelated business income tax for account owners.
Provide guidance to IRA owners and custodians on how to determine  and document fair market value (FMV) for certain categories of hard- to-value unconventional assets. For example, IRS could consider  updating Form 5498 instructions to custodians on how to document  FMV for hard-to-value assets (e.g., last-known FMV based on  independent appraisal, acquisition price) and provide guidance  directed at account owners that provides examples of how to  ascertain FMV for different types of unconventional assets.
Clarify the content of the model custodial agreement to distinguish  what has been reviewed and approved by IRS and what has not. For  example, IRS could consider: (1) restricting custodians from stating  that the form has been “preapproved by the IRS” on the form; (2)  adding language to specify which articles have been preapproved by  the IRS and which have not; and (3) limiting custodians from adding  provisions to the model form other than those preapproved by the  IRS.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Commissioner of Internal  Revenue, the Secretary of the Treasury, the Secretary of Labor, the  Chairman of the Securities and Exchange Commission, and the  Chairman of the Federal Deposit Insurance Corporation for comment. In  its written comments, reproduced in appendix III, IRS generally concurred  with our findings and recommendations. In addition, each agency  provided technical comments, which we incorporated as appropriate.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Internal Revenue  Service, the Department of the Treasury, the Department of Labor, the  Securities and Exchange Commission, the Federal Deposit Insurance  Corporation, and other interested parties. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  Charles A. Jeszeck at (202) 512-7215 or James R. McTigue, Jr. at (202)  512-9110. You may also reach us by e-mail at jeszeckc@gao.gov or  mctiguej@gao.gov. Contact points for our Offices of Congressional   Relations and Public Affairs may be found on the last page of this report.  GAO staff who contributed to this report are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives for this study were to determine: (1) what is known about  the prevalence of retirement accounts that invest in unconventional  assets; (2) how these accounts are managed, and; (3) what challenges, if  any, are associated with the administration of these types of retirement  accounts.
subsections: section_title: Overall Methodology
paragraphs: Each of the engagement’s three researchable objectives required us to  identify various arrangements for investing individual retirement account  (IRA) and 401(k) plan savings in unconventional assets. For all  objectives, we reviewed pertinent federal laws, regulations, and guidance  on the use of retirement account savings, as well as recent federal and  state enforcement actions against entities involved with these types of  retirement accounts. In addition, we searched for relevant scholarly and  peer reviewed materials, trade and industry articles, government reports,  conferences papers, research publications, and working papers. We also  interviewed a range of federal and state regulators, industry stakeholders,  and participant advocates.
To determine the prevalence of retirement accounts that invest in  unconventional assets and better understand how these accounts are  managed, we conducted multiple structured data collection efforts from  custodians and service providers that allow investment in unconventional  assets. To identify challenges associated with administering retirement  accounts that invest in unconventional accounts, we analyzed investor  complaint data from three federal agencies and two independent  organizations. We also used the multiple structured data collection efforts  from custodians and service providers to obtain their perspectives on  potential challenges for account owners and providers. In addition, we  reviewed publicly available custodian and service provider  documentation, including application forms, fee disclosures, and custodial  trust account agreements, which are used to establish a traditional IRA  and specify account owners’ roles and responsibilities. All data collected  through these methods are nongeneralizable and do not necessarily  reflect the experience of the entire population of custodians and service  providers that hold retirement accounts invested in unconventional  assets, and account owners who invest in unconventional assets.  However, we believe the insights gained through these methods  produced valuable information to better understand the extent and form of  retirement account investment in unconventional assets.
section_title: Structured Data Collection Efforts
paragraphs: To identify custodians and service providers of retirement accounts who  allow retirement account owners to invest in unconventional assets, we  conducted a literature search, reviewed industry websites, interviewed  industry stakeholders, and reviewed the Internal Revenue Service’s (IRS)  list of nonbank custodians. Through this process we identified 26  custodians and 48 service providers with experience working with  account owners in establishing and managing such accounts. We  determined that these data were sufficiently reliable for the purpose of  this report.
Next, to learn about the approximate number and value as well as types  of retirement accounts held under custody at the end of calendar year  2015, we conducted a survey data collection effort from the 26 custodians  that we had identified from available sources. We obtained responses  from 17 custodians who varied in terms of the number and value of  accounts they held, and the types of unconventional assets they allowed.  We focused our effort on custodians as they are responsible under the  Internal Revenue Code (IRC) for reporting the fair market value of all  IRAs under custody to IRS. This removed the potential for double  counting accounts and assets reported by both a service provider and the  custodian they use to house clients’ account assets. Through this effort,  we also collected information on the types of unconventional assets  account owners most commonly invest in. We confirmed the accuracy of  account and asset data reported by 10 custodians who agreed to  participate in a second structured data collection effort.
To examine how these retirement accounts are managed and get a sense  of the challenges they present to account owners and providers, we  conducted additional structured data collection efforts. We developed a  follow-up set of questions for the same 17 custodians and received  responses from 10 of them. We also developed a similar set of questions  for the 48 service providers we identified who provide administrative  support for IRAs and solo 401(k) plans, collecting information from 21 of  them. Through these efforts, we collected information on the steps  needed to establish a retirement account for the purpose of investing in  unconventional assets, as well as the roles and responsibilities of various  stakeholders in managing and administering accounts. We also collected  providers’ perspectives on the reasons why some account owners choose  to invest IRA and 401(k) plan savings in these types of assets and the  challenges to account owners and providers may face in doing so. We  determined that these data were sufficiently reliable for the purpose of  this report.
section_title: Analysis of Investor Complaint Data
paragraphs: To augment our understanding of challenges associated with managing  retirement accounts invested in unconventional assets, we analyzed 334  investor complaints obtained from three federal entities—the Department  of Labor (DOL), the Office of the Comptroller of Currency (OCC), and the  Securities and Exchange Commission (SEC)—and two independent  organizations—the Financial Industry Regulatory Authority (FINRA) and  the Better Business Bureau. Our list of custodians and service providers  was used to query databases for relevant complaints. We analyzed the  complaints to develop general categories of challenges. We then  conducted a two-step review and arbitration process to ensure proper  categorization of each of the 211 complaints that we determined were  directly associated with retirement accounts invested in unconventional  assets based on available information. We did not confirm the authenticity  of these complaints or investigate any of the allegations made. In  addition, we did not collect information about all of their resolutions. We  determined that the data we collected were sufficiently reliable for the  purposes of this report.
section_title: Review of Custodial Agreements
paragraphs: To assess the clarity of information new IRA owners receive about their  roles and responsibilities from custodians who allow investment in  unconventional assets, we collected and reviewed 20 publicly available  custodians’ individual retirement custodial account agreements, which  IRS requires custodians and account owners to complete to establish a  traditional IRA. We analyzed the content of these agreements and  compared their format with the format of the IRS model Form 5305-A.
section_title: Appendix II: Excerpts of Language Included in IRS Model Form 5305-A
section_title: Appendix III: Comments from the Internal Revenue Service
section_title: Appendix IV: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above Christopher Falcone, Emily  Gruenwald, David Lehrer, Jonathan S. McMurray, Jessica Moscovitch,  Thomas Moscovitch, and MaryLynn Sergent made key contributions to  this report. James Bennett, Amy Bowser, Caitlin Croake, Sheila McCoy,  Jean McSween, Jessica Orr, Walter Vance, Kathleen Van Gelder, and  Adam Wendel also provided support.