While a self-directed 401k, also known as self-directed solo 401k or Solo 401k, is a safe method to invest retirement funds, you should be careful of promoters of fraudulent investment schemes, as they often target self-directed 401ks because self-directed 401ks allow investors to invest in an array of asset types such as real estate, promissory notes, tax lien certificates, precious metals and private placement securities.
Make sure you understand your role as trustee of the solo 401k. For instance, you as trustee are ultimately responsible for choosing investment types and determining their validity. Therefore, make sure to examine the quality or authenticity of an investment and its sponsor. As the investor, make sure to review investment offers and investment promoters by checking with regulators such as North American Securities Administrators Association's website. http://www.nasaa.org/
As trustee of the Self-Directed 401k, you generally safe keep the plan's alternative investments, which are unregistered securities (that is, they are not required to be registered with the SEC), with the cash held in the plan's checking account. Since you have easy access to your plans liquid funds and make the final investment decision, fraud promoters typically will offer large investment returns and spotty paperwork that has not been audited. Remember that all investments have certain risk, and the amount of risk generally correlates with the investment return. In other words, low risk investing generally equals low returns and large returns are usually associated with higher risk. A tactic fraud promoters commonly incorporate is promising high returns with no risk. Don't fall for it!
To prevent fraud, review and verify the investment sponsors account statements as alternative investments are tough to value and may be illiquid. As a result, they may be listed at their original price for several years. Also, stay in contact with the investor sponsor and get your attorney or accountant involved in reviewing the investment statements for accuracy.
Additional Information
Several government websites contain educational information for investors regarding preventing investment fraud. Here are some of them:
SEC's Investor.gov website: http://www.investor.gov/
NASAA's investor education webpage: http://www.nasaa.org/
Also check out:
Questions You Should Ask about Your Investments:
How to Avoid Fraud: http://www.sec.gov/investor/pubs/avoidfraud.htm
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