Lending Club Offers Self-Directed IRAs

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Lending Club, through EntrustCAMA, recently announced that they were going to offer self-directed IRAs. When you open an IRA with a brokerage firm, you can invest in stocks, bonds, and mutual funds. When you open a self-directed IRA, you can invest in pretty much anything as long as you follow a few rules. I won’t go into those rules, you can read about self-directed IRAs at the Motley Fool, but this is a savvy move by Lending Club but I think it’s a mistake for average investors to participate.

I Don’t Like Self-Directed IRAs

Self-directed IRAs have grown in popularity over the last year because people are looking for alternatives to the stock market. The volatility in the stock market, coupled with economy uncertainty, has encouraged people to find alternatives and some have turned to some romantic investments like wine, art, real estate, etc. I know I’d invest a little bit of money in LendingClub if I could (Maryland residents are not yet permitted to invest) but I wouldn’t open a self-directed IRA just to be able to invest my retirement on consumer debt.

I don’t like playing games with my retirement assets. Even though social lending networks have exploded in popularity over the last year or so, they’re still relatively new. When Prosper, a competing social lending network, first appeared, people clamored all over the idea. Then, the defaults started rolling in. People will always default on loans, it’s part of the business, but the default rates were higher than the projected rate and investors howled. Unfortunately, default rates sometimes exceed projections (part of the reason why the economy is so bad now, mortgage defaults were higher than anticipated). However, it’s not a big deal when it’s some side investment income on the line… it’s huge if it’s your retirement on the line.

I recognize LendingClub’s claim that investors have earned 9% annually. I recognize that the self-directed IRA is through a fairly reputable firm (EntrustCAMA is a subsidiary of The Entrust Group, a 25-year old self-directed IRA administration firm). I also recognize that I am far more comfortable investing in the topsy-turvy stock market, especially with the sale going on now, than in something with a 20 month history. Whether or not this is appealing will have to come from your own experiences and comfort level. I know that I’d be willing to invest some side cash with LendingClub but my retirement assets? No thanks.

About Lending Club’s Self-Directed IRAs

But, let’s say you are interested, should you do it? Let’s take a look at their fees.

No account opening fees and a flat $250 annual account maintenance fee starting in 2010. Compare this to EntrustCAMA”s typical fee schedule and you’re getting quite a deal. According to their IRA application form (page 4 lists fees) there are two main fee options – one based on your investments and one based on account balance. In both cases, there’s a $50 account opening fee. Then option one, the number of asset investments based option, charges you $250 per investment per year. Option two has a percentage schedule based on your account value, with a minimum of $125.

Just because it’s cheaper than standard doesn’t make it a great deal. $250 on a $5000 balance is a whopping 5%! That’s a huge hurdle to overcome each year. Even if you were to contribute the maximum $5,000 for 2008 and $5,000 for 2009, the $250 still represents a 2.5% weight on your IRA. And if you ever want to close your account, it’ll cost you a little bit:

Partial or full termination, which includes transfers of assets from your account to anyone, is calculated on one-half of one percent of the asset
value of the amount transferred, plus sale transaction charges for each asset. This includes lump sum distributions, but does not include
normal eligible distributions. Minimum fee for this service: $150. Annual record keeping fees are not prorated when an account closes.

It’s up to you to decide whether you should open a self-directed IRA and invest in notes at LendingClub but I’m going to pass on this offer.

{ 10 comments, please add your thoughts now! }

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10 Responses to “Lending Club Offers Self-Directed IRAs”

  1. Stephen says:

    I don’t know if Lending Club is the best place for you to save for retirement.

  2. Chuck says:

    Having solid 9% gains is a drag, when those gains are taxable, so I can understand the desire to stuff them into a IRA. Stuffing your dividend-bearing investments in an IRA and keeping capital gains bearing stocks in your taxable account is age-old wisdom.

    However, a $250 annual fee for an IRA is unforgivable. Your 9% gain is reduced to 6.75% if it’s taxable (25% bracket assumed) but that 9% is supposed to compensate you for potential losses, and if you suffer losses, your tax is reduced. That $250/year is relentless, and will apply if you’re invested or not. Sounds crazy to me.

  3. Mike says:

    We all hate fees, but sometimes you have to spend money to make money. Most of my stock portfolio is in Vanguard ETF’s with exceedingly low fees. The way that I look at my Lending Club IRA is that after two years of fully funding my SIMPLE IRA @ 13,500/year. my total cost for the first two years is .92%. Many ETF’s are in that 1/2% a year range. (Don’t forget that Lending Club takes a 1% cut on your loan paybacks, but it works out to be less than 1% when analyzed over an entire year, and the same applies to their non-retirement accounts.) But if I can earn 10% on my funds without the implied volatility of the stock market, I feel I will be ahead of the game. After two years if my Lending Club SIMPLE IRA is worth about 30k, it will still represent only a small portion of my overall retirement portfolio. I think this is a good option for some people, as long as you go into it with your eyes open and invest only a small percentage of your total retirement funds in it. By the way, I invested with Lending Club before they offered their IRA option, and have been very pleased with my returns and lack of defaults, so far. I do agree that if one invests a relatively small amount of money in an IRA to test the waters, so to speak, the annual fee does become quite a significant drag on your return.

  4. Lance Newton says:

    Unsecured lending in an IRA makes little sense to me. An unsecured loan from an IRA should probably be viewed as a gift of some sort, since you have no recourse to the borrower. They social lending networks are really nice when loans are repaid, but unless you don’t need the money you are lending, why take the chance on an unsecured loan?

    On the other hand, secured lending in hard assets has gone on forever and if you don’t get paid, you have recourse to the underlying assets.

    The returns on secured lending in many states more than compensate for the fees in self directed retirement plans. With your analytical abilities, you should take a closer look at self direction of investments that you understand and perhaps some new venues that counter inflation, like real estate and precious metals.

    Remember that you can invest in all forms of traditional Wall Street and Insurance Company investments in a Self Directed Plan and perhaps get the best of both worlds!

  5. Mike says:

    Thanks for the suggestions, Lance. I appreciate the feedback. I do own some precious metals and REIT’s and I thought that this segment of my retirement investment could stand some exposure to these types of loans. If I experience more than one or two defaults, I’ll reconsider this approach.

  6. Lender says:

    There’s really no buyer for your notes, unless you sell for a loss. Recently, the number of people lending money have dropped off drastically. As for you paypal deposit, you have to use it all with LendingClub or they’ll lock your account out. Imagine that, having your account locked out when it’s not even in the contract.

    A company that makes up new unadvertised rules with your money. You decide.

  7. Mike says:

    Quick follow up. I recently added some funds to my LC IRA account and learned that Entrust charges $25 to wire funds to LC, and $5 to forward a check to them. These charges are covered by LC this year, but it’s this kind of nickel and diming that leaves a bad taste in many investor’s mouths. On top of this, it took five days for my funds to be wired, because I initiated the request on the Friday before Memorial Day, and there is a two day ‘waiting period’, according to the Entrust rep I spoke with. BOGUS!

  8. Chump says:

    Self directed IRAs are highly speculative (thus the potential for a higher return) and also higher risk as well as susceptible to outright fraud. It really should be called a High Risk Tax Deferred Investment Account so as to not lull in unsuspecting investors believing that they are merely investing their retirement into a more aggressive but otherwise traditional IRA.

  9. Shane says:

    I agree, $250 is nuts! But now it is only $100 and it is waived the first year with $5000 in base and the second year with $10000 in base.

    Incidentally, the key with lendingclub is to loan the smallest amount on the most loans. Also avoid the higher risk categories (the loan purpose) and stick to the more educated borrowers. Car loans are likely to have lower default rates as they can lose the car. People that are refinancing higher rate debt have achieved some level of a financial education. People that are using loans for things like weddings or dream vacations? Perhaps not the most reliable.

    Don’t make P2P lending personal, treat it like any other investment.

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