2018 SEC Alert for Solo 401k and IRA Investors

The Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy updated their investor alert for self-directed IRAs, which includes self-employed IRAs such as SEP  and SIMPLE IRAs, and fraud on August 8, 2018. While the alert does not specifically name another popular self-employed plan known as the self-directed 401k, it is safe to say that solo 401k investors should also take note.

Both self-directed IRAs and self-directed solo 401k plans are easy targets by fraudsters because they can be invested in alternative investments such as promissory notes, mortgages, tax liens, digital assets (bitcoin, litecoin, and etherum). private companies, and real estate.

The concern of the SEC is that self-directed IRA custodians main responsibility is to hold the IRA assets so they are not require to vet investment sponsors or promotors, even though in many instances the IRA holder thinks the IRA custodian is helping to vet the investment or sponsor before making the IRA investment. The SEC report states that “fraudsters” commonly use a tactic of misrepresenting the role or duties of the self-directed IRA custodian and also state the investment is protected against losses.

Fraudsters also target self-directed IRAs and self-directed solo 401k plans because they are designed to be held for the long-term (retirement). For example, penalties apply if distributions are made before age 59 1/2 and distributions are not required until age 70 1/2. These characteristics make it easier for fraud to be committed in self-directed retirement accounts, as there may be less active oversight on the part of the IRA or solo 401k owner to monitor the alternate investment holding in the account. While investing in physical real estate may be less prone to attract “fraudsters,” other alternative investments like promissory notes (especially pooled notes) and private funds have little public information available and what is available may not be properly audited, if at all. This makes it harder for the IRA and solo 401k owner to make an informed decision

According to the SEC Alert, here are ways to reduce possible fraud against self-directed retirement accounts.

  • Verify information in self-directed IRA account statements. Alternative investments may be illiquid and difficult to value. As a result, self-directed IRA custodians often list the value of the investment as the original purchase price, the original purchase price plus returns reported by the promoter, or a price provided by the promoter. If possible, take steps to independently verify information—such as prices and asset values—provided in account statements.
  • Avoid unsolicited investment offers. Investors should exercise extreme caution before investing in an unsolicited investment offer that promotes the use of a self-directed IRA. Fraudsters may attempt to lure investors into transferring money from traditional IRAs and other retirement accounts into new self-directed IRAs.
  • Ask questions. Always ask if the person offering the investment is registered or licensed, and if the investment itself is registered. Then check out the answers with an unbiased source, such as the SEC or your state securities regulator. The SEC has a short publication called “Ask Questions” that discusses many of the other questions investors should ask of anyone who wants them to make an investment, including about the background and history of the promoter. Please take a look at it before making any investment decisions.
  • Be wary of “guaranteed” returns. Every investment carries some degree of risk, and the level of risk typically correlates with the return an investor can expect to receive. Lower risks generally correspond to lower yields (or returns). By contrast, higher yields typically involve higher risk. Fraudsters often spend a lot of time trying to convince investors that extremely high returns are low risk by calling them “guaranteed” or “can’t miss” opportunities. Be extremely wary of such claims. High returns typically represent potential rewards for investors who are willing and financially able to take big risks.
  • Consult a professional. For investment opportunities like alternative assets in self-directed IRAs, investors should consider getting a second opinion from a licensed, unbiased investment professional or an attorney. This is especially important if an investor is opening or creating a new account outside a traditional financial institution or well-recognized broker-dealer.

Links from the SEC Alert: 














For more tips on avoiding investments fraud, CLICK HERE.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


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