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. 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.) 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. . 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. 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.