Assuming you still have money left in your pension plan, there are plenty of companies who are more than willing to “help” you invest it and look after it. The problem is, some of these companies don’t necessarily have your best interests at heart!

Recently I had a client come to me about setting up a self-directed pension plan, managed by the special LLC that gave her checkbook control. Not a problem – we do that all the time. She was already with my recommended custodian, which made things even easier.

But then she came back to me after attending a weekend seminar by another company. She’d been told at that seminar that she could be her own custodian, and didn’t need the third party. I was pretty surprised. It’s not that you can’t be your own custodian … but given what’s involved, I don’t understand why anyone would want to.

A custodian is a company that is either approved and regulated by the IRS or is affiliated or owned by a bank or trust company. If it’s the latter, the custodian is still subject to state banking regulations and the FDIC, in addition to IRS regulations.

The role of a custodian is to handle both the administrative functions of a retirement account, as well as the plan’s money. They prepare and file the tax returns and other regulatory paperwork, and make sure that you aren’t engaging in prohibited transactions or working with disqualified parties.

The plans that a qualified custodian offers have all been pre-approved by the IRS, through a determination process. This can be lengthy and expensive – Diane and I estimated the cost to be around $15,000 for this step. Next step is to go through the FDIC and other agencies to become qualified as a custodian. We figured that would be another $5,000 or so, and could take a year or more. There’s going to be a heck of a learning curve regarding the maze of federal and state tax regulations that will govern the plan assets.

Finally, there’s a tax return to think about. A complicated, detailed tax return, that few CPAs are qualified to prepare. We were curious, so Diane contacted someone she knows in the industry. He told her to expect a minimum $5,000 bill, if she could find a CPA willing to do the return.

Now, I’m pretty darned sure that if someone told me I’d have to pay $25,000 or more, take a year out of my life, and embark on what’s amounts to a college degree’s worth of education on tax and pension regulations, I’d probably say “no thanks” and go to a qualified custodian. That makes me pretty sure that the company in question didn’t give my client the whole story.

I’m glad she came to me first, and is in good hands with her existing custodian. But stories like this make me angry. This is someone’s financial future we’re talking about – not some abstract concept. The penalties for screwing up your pension are huge … you could potentially be fined an amount equal to 50% of your pension’s entire value if you enter into a prohibited transaction. I don’t know why anyone would give out this kind of advice.

So, in the words of Sgt. Phil Esterhaus, “Let’s be careful out there.”