How would you like to put $100,000 into a defined benefit plan or cash balance plan and use it to buy gold and precious metals? You also will get a tax deduction. Is this really an option? I will fill you in on the details.
I get asked all the time about using alternative assets in a retirement plan. The client usually is look for a nice tax deferral, but doesn’t trust the stock market. Gold, silver and precious metals may be the only investment they understand.
Table of contents
Gold & Precious Metals in a Defined Benefit Plan
I have some good news. This can be done. But there are a few restrictions and some compliance headaches you will have to deal with. But if you really are intent on making it happen, we can help you out.
If the owner’s goal is to invest in precious metals, the company must hire a third party administrator (TPA) who works with these assets classes. The plan document should be carefully drafted and the plan must allow this type of investments
But there is one thing I want to address upfront. This is generally only a good idea for an owner only (and the owner’s spouse) plan. When other employees are involved the compliance headaches and risk is just too much.
Gold, Silver & Precious Metals Compliance Issues
Below are the compliance issues that need to be addressed:
- Bonding requirements;
- Reviewing form 5500 requirements; and
- Year-end valuation questions and concerns.
Gold, silver and precious metals are called “non-qualifying” assets. These are defined as any asset that is not held by a regulated financial institution such as a bank, insurance company, brokerage, or mutual fund provider.
Most plans don’t fall under this category because most companies will invest in mutual funds or stocks. So compliance is definitely easier when using only qualified assets.
For cash balance plans that fall under ERISA, the company will need to maintain a fidelity bond that will cover at least 10% of the total value of the qualified plan assets. This amount is calculated using assets as of the beginning of the plan year.Looking for more information on cash balance plans? Take a look at our ultimate guide to cash balance plans. Discover our favorite strategies!
The minimum fidelity bond requirement is $1,000 and the maximum requirement is $500,000. But don’t worry. These bonds are generally inexpensive and easy to obtain. We often assist clients in obtaining the bonds.
Cash Balance Plan & Defined Benefit Plan Compliance
The DOL has regulations that govern the rules as it relates to alternative assets. They allow a company to waive any audit requirement for small cash balance plans that have less than 100 participants if the plan meets at least one of the two following exceptions:
- No more than 5% of plan assets include “non-qualifying assets.” We discussed this previously.
- The pension plan has a bond in place for at least 100% of the value of non-qualifying assets held. If the plan is not a one-participant plan, does not meet one of the exceptions to the audit requirement, or if the company does not have a bond in place, you should contact your insurance broker immediately to obtain proper bond coverage.
As a general rule, a solo plan is not covered by ERISA. The plan is able to file form 5500-EZ and would typically not have to maintain bonding. However, when a solo plan holds non-qualifying assets, it is required to file Form 5500 (not EZ or SF). There is no ‘one-participant plan’ election that is available in Part I of the form. The result is it is treated as a single-employer plan which will trigger the required fidelity bond.
Here’s an example
We know that these rules can be complex. We come across situations all the time when clients are confused and find themselves in bad situations.
Below is an inquiry we received from one client who thought gold and precious metals were a great idea for her defined benefit plan.
I sold my business and retired 4 years ago. My then CPA had recommended a Defined Benefit Plan. We set it up then a couple years later, my new CPA said he would handle it. I purchased $200,000 worth of gold and silver and put it in the DBP. It all went into a safety deposit box at the bank. Now, I am moving it to a jeweler’s vault because it will be insured. I have not done anything with this. Have not taken any money nor did I do RMDs. My CPA sold his practice and moved out of state without advising any of his clients. I would like to talk to you and see if you can help us figure out what to do. Would that be possible?
How to buy gold and precious metals
- Decide if it is right for you. These assets can be a little more risky so it can add volatility in your plan.
- Make sure your plan allows it. Your plan may need to be amended to allow for the acquisition of non-qualifying assets.
- Develop a compliance checklist. We have discussed the compliance issues. Make sure that your coordinate the initiatives with your TPA.
- Consider non-qualifying assets in a 401k. Because 401k plans do not require an annual review by an actuary, it usually makes sense to invest there first to limit volatility.
- Review with your TPA. Make sure that you discuss the issue with your TPA prior to any purchases of non-qualifying assets.
This above situation is unfortunately very common. People will just dive into plans without understanding what they are getting themselves into.
Regarding the client issue, we fixed the problem and got her back on track. However, it was complex and costly. So make sure you do your due diligence before you dive in.