Lending Club Adds Self-Directed IRAs
This morning, Lending Club announced that investors could now invest in loans through a self-directed IRA (Individual Retirement Account). Self-directed IRAs are administered by EntrustCAMA, part of the Entrust Group.
To open an account, go to Lending Club’s retirement accounts page and start the process. There is a minimum account balance of $5,000, and a $250 annual maintenance fee (although the fee is waived for 2009).
This is a big step for P2P lending, and will allow Lending Club to capture the huge pool of self-directed retirement investors in the US.
Doing the math, though, the $250 annual fee seems to kill the returns, especially in the beginning. Ignoring the current promotion, investors will pay a $250 fee on an account balance of $5,000. That’s a 5% fee. Netting the 5% fee out of the average returns touted in the Javelin study of 9.05% gets you a return of 4% per annum. If you choose a tax-free IRA, that’s equivalent to a taxable return of 5.5%. With 2-year CDs hovering around 2.5%, maybe this is okay. But as interest rates rise in the long term, this will be harder to swallow.
I give Lending Club a lot of credit for pulling this off, despite the unfortunate pricing structure. As time goes on, and you invest more in your self-directed IRA, the annual return should continue to rise. It just seems like a percentage pricing structure based on volume would have been better for investors (and in the long run, better for Lending Club and EntrustCAMA).
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P2P Lending News:
Thank you for sharing the news about this breakthrough new product offering from Lending Club.
I want to directly address your comments regarding fees. A flat annual fee of $250 per year after the first year is actually a very competitive fee for a Self-Directed IRA (which is quite different from regular, no-fee IRAs typically offered by brokerage firms). Self-Directed IRAs can support a broad range of asset classes and usually charge an account opening fee (not the case here) and higher annual fees. Also the math is more attractive when you assume a $30k average account size, as opposed a $5k average: we ran a pilot program over the past 2 months and the average dollar amount transferred by lenders from existing IRAs was about $30k.
Happy to answer any other questions you may have, and thanks again for covering this new space.
Rob Garcia
Director of Product Strategy @ Lending Club
I participated in Lending Club’s pilot program and invested my SIMPLE IRA contribution for 2009 with them. After funding it to the max this year and next (with the over 50 catch up), I’ll have $27,000 before returns. I will pay ENTRUST $250 next January to cover both 2009 and 2010. That puts the annual cost in the ballpark of many ETF’s at .46%, but still higher than Vanguard Vipers. If you only invest a few thousand dollars, the annual fee will definately reduce your rate of return significantly. In addition to Lending Club’s rules for net worth for their lenders, this may be another way of selecting for more serious investors instead of dabblers.