7704 / Can a taxpayer hold precious metals within a qualified pension plan?

The law currently allows a defined contribution 401(k) (and profit-sharing) qualified plan, and even a defined benefit plan, to invest in precious metals to the same extent permitted (and prohibited) under IRC Section 408(m) (see Q 7706). However, advisors must also consider the prohibited transaction rules contained in IRC Section 4975 and ERISA Section 406, and the regulations under ERISA Sections 404(c) and 404(b) when investing in precious metals through a defined contribution qualified plan, including an IRA.¹

As noted, qualified defined benefit pension plans are also legally permitted to invest in precious metals as plan assets subject to the same Section 408(m) requirements imposed on permissible investments, but such investment generally makes little sense when there are plan benefit maximums allowed. Actually, as the IRS notes, “although there is no list of approved investments for retirement plans, there are special rules contained in the Employee Retirement Income Security Act of 1974 (ERISA) that apply to retirement plan investments.” In general, a plan sponsor or plan administrator of a qualified plan who acts in a fiduciary capacity is required, in investing plan assets, to exercise the judgment that a prudent investor would use in investing for his or her own retirement.²

In addition, certain rules apply to specific plan types. For example, there are different limits on the amount of employer stock and employer real property that a qualified plan can hold, depending on whether the plan is a defined benefit plan, a 401(k) plan, or another kind of qualified plan (ERISA Section 407). Certain plans, such as 401(k) plans, that permit participant-directed investment can avoid some fiduciary responsibilities if participants are offered at least three diversified options for investment, each with different risk/return factors.³

Under the IRC, both participant-directed accounts and IRAs are prohibited from investing in certain collectibles. See Q 7706 for details.

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Planning Point: As a practical matter, a large corporate plan with many participants is unlikely to offer precious metals permitted under IRC Section 408(m)(3) as an investment in its “participant-directed” 401(k) plan because of the complications for the trustee, except perhaps in the stock or precious metals ETF form.

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However, for small business owners and professionals that can meet the qualifications to implement and use a so-called self-directed “solo 401(k)” (a one-person plan, or a precious metals IRA, and perhaps even a small solo defined benefit pension plan) precious metals might be purchased as a plan asset. However, even though some of these qualified plan vehicles may allow a pre-tax purchase of the investment, the vehicle itself generally requires compliance with substantial rules, especially prohibited transaction rules, and reporting requirements, plus with distribution treatment ( Q 7703) of the investment from the plan that may make acquisition of the precious metal through one of these retirement plan vehicles less attractive than by individual
purchase.

No qualified plan approach to acquisition of plan-permissible precious metals should ever be attempted by an investor without professional legal and tax guidance, and a plan administrator both experienced with the special issues surrounding physical precious metals (other than precious metals stock interest and the like) as plan assets and a proven credible history of prior administration of such metals.