Blog: Bearmoor Notes

Wednesday, August 12, 2009

I.R.A. Custodian Responsibilities - A Refresher

The old adage of “follow the money” appears to be the case for many individual retirement account (I.R.A.) owners; especially when a Ponzi scheme is involved. Events over the past twelve months have shined a brighter light on the responsibilities of I.R.A. custodians. These events include recent lawsuits against custodians, the Madoff scandal, and increased media attention. I.R.A. owners are interested in getting some, if not all of their monies returned to them and they are looking at entities that have the deep pockets to share this responsibility.

The types of assets held within I.R.A. accounts vary greatly. Many of the unique assets within an I.R.A. can be complex and difficult to price. Even though regulation exists that requires fair value pricing to be obtained on all I.R.A. assets, the practice of doing so may not always be adequately implemented. Recent lawsuits claim that I.R.A. custodians failed to perform both their contractual and fiduciary duties, and as a result failed to protect the account. The claims further state that I.R.A. custodians aided and abetted the breach of fiduciary duty.

The establishment and administration of I.R.A. accounts is governed by the Internal Revenue Code and accompanying Treasury regulations. The custodian has responsibility for several areas regarding I.R.A. accounts. One area that is being scrutinized and reviewed is asset pricing. The regulation states the following: The custodian will determine the value of the assets held by it in trust at least once in each calendar year and no more than 18 months after the preceding valuation. The assets will be valued at their fair market value.

In light of recent events, now might be an opportune time to review your asset pricing policies and practices pertaining to I.R.A. accounts. Custodians should pay special attention to those assets that are hard to value. In addition, I.R.A. account acceptance standards should be reviewed to determine if some of the risk can be mitigated prior to acceptance for new accounts. The fee for providing custodian services should also be reviewed to determine if optimum risk adjusted revenue is being obtained.