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Lending Club Offers Self-Directed IRAs

Lending Club [3], through EntrustCAMA [4], 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 [5], 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 [6] (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.