IRA Custodians

Individual retirement accounts are domestic trusts or custodial accounts created by a written instrument for the exclusive benefit of an individual or their beneficiaries. Trustees of these accounts must be banks, savings and loan associations, insurance companies, federally insured credit unions, or others who can demonstrate to the IRS the ability to properly administer the trust or account under the law.

The written IRA instrument must include limits on the trustee’s authority to invest, commingle, and distribute the funds.

Many individuals are attracted to financial institutions for the establishment of their IRAs by offers of cash bonuses or other gifts. However, the receipt of premiums or free/reduced-cost bank services may violate ERISA rules. Generally, individuals may not receive reduced or no-cost services if qualified plan assets are taken into account when pricing those services.

The Department of Labor has issued an exemption that allows custodians to give small gifts or free/reduced-cost services without violating ERISA rules:

• Banks and other financial institutions may offer cash or other gifts for opening or making additional contributions to IRAs — provided the value of an incentive is no more than $10 on deposits up to $5,000 and $20 on deposits over $5,000. These premiums may be paid to the person for whose benefit the IRA is established or that person’s family members.
• Another exemption allows banks to provide services at reduced or no cost to individuals with beneficial interests in IRAs, provided those services are offered by the bank in the ordinary course of business to non-IRA customers who qualify. Third-party service providers (such as check printers) may offer incidental products of de minimis value if directly related to banking services.

The Comptroller of the Currency has cautioned banks about paying “finder’s fees” in connection with IRAs. ERISA standards completely prohibit offering payments in the nature of finder’s fees to third parties or to an employer whose employees set up a payroll deduction IRA.

Registered broker-dealers may also provide services at reduced fees or no cost to IRA and Keogh plan customers, or use account balances to determine eligibility for discounted prices. Such services may include financial planning, direct deposit/debit and automatic fund transfers, enhanced account statements, toll-free client service access, check writing, debit/credit cards, special newsletters, and reduced brokerage and asset management fees.

The Federal Reserve Board has developed a framework of IRA deposit advertising rules. Advertisements for time deposits that pay more than one fixed interest rate must set forth, in equal type size, each rate of interest to be paid, the length of time each rate will be paid, and the average effective annual yield for the entire term of the account.

Importantly, advertisements for IRA deposits should not refer to contributions as being “tax-free” or “tax exempt.” Advertising must make clear that contributions to, and earnings on, IRAs only result in a deferral of federal income taxes.

Additional advertising requirements include:

• Interest rates must be stated in terms of the annual rate of simple interest
• Advertisements displaying an effective annual yield based on compounding must state the annual rate of simple interest and the basis of compounding
• No interest rate may be advertised based on a period of more than one year (to prevent artificially inflated yields)
• If an advertised rate is payable only on a deposit meeting a specific time or amount requirement, those requirements must be stated clearly and conspicuously
• Advertisements for time deposits must state that interest penalties apply in the event of early withdrawal
• Member banks must inform customers at account opening of the method used to compute and pay interest, including any provisions for nonpayment of interest