Pulitzer Prize winning reporter and senior editor Mark Maremont of the WSJ wrote the following two stories, explaining how Presidential Candidate Mitt Romney built his IRA to as much as $100 million. Both stories were based upon original Parish & Company analysis. The purpose of this analysis is not to directly disparage Romney but rather note that his conduct with respect to this scheme is worthy of discussion.
The reason these stories are significant is that during Presidential Candidate Mitt Romney’s tenure at Bain, employees were able to use a special scheme, outlined in detail by Maremont of the Wall Street Journal, to put undervalued Bain related partnership investments into their SEP-IRA accounts, thereby going far above annual contribution limits afforded other taxpayers. Some argue this is aggressive financial engineering while others argue it is outright tax fraud. At a minimum it certainly has ignited a debate regarding fairness.
When Romney first ran for President in 2008 the law firm that handles his blind trusts, Ropes & Gray, also crafted a new pension plan for Bain Capital. Unlike the previous plan, the new plan allows the firm to hide the same scheme set up by Romney. The problem is that this appears to be garden variety tax fraud in clear violation of important retirement plan rules. A fraud enabled by one key provision, an official retirement rollover age of 23.
Bain’s use of an official retirement age of 23 essentially allows all existing employees, each year, to act as if they are doing a retirement related rollover from their profit sharing to IRA accounts outside the ERISA regulatory umbrella. Of course, if I or most businesses had 23 as an official retirement age the IRS would laugh and shred the plan.
Bain will argue that the new plan set up in 2008 has a standard mix of choices that appeals to unsophisticated investors while those wanting more choice can roll their balance into a self directed IRA. Since a self directed IRA is not an employer sponsored plan like a SEP IRA, or the new profit sharing 401K plan, they basically cover their tracks with respect to Bain interests being stuffed into IRA’s.
Put another way, there is no overall disclosure or oversight possible to determine if the plan is in compliance with key ERISA and tax rules. These include key anti discrimination rules designed to ensure all employees have equal access to investment choices. One might call this a divide and disguise strategy.
In order to complete what some might see as a cover up operation, Ropes and Gray removed itself as the plan sponsor and farmed the plan out to Angell Pension Advisors in 2008, the year Romney first ran for President. The net effect is that Bain is still using the same scheme hidden behind an administrative non-disclosure curtain.
Other leading companies including Intel and Nike now allow employees a brokerage option as a fundamental part of their 401K profit sharing plan. This allows employees to invest in individual stocks or whatever they like. The problem for Bain would be that if they did this, rather than the annual rollovers to IRA’s via claiming an official retirement age of 23, they would have to disclose via annual 5500 filings the extent to which they are investing in their own leveraged deals.
Special rules exist with respect to partnership related investments in retirement accounts that are “leveraged” and this could expose employees to what is called UBIT tax. The only way to avoid this is to invest in offshore “blocker corporations,” as Romney has with respect to his IRA. Without the blocker corporation as a shield, employees would have to file a special annual return and pay a rate on the gain of approximately 35 percent. Such blocker corporation related investments would also need to be revealed in the 5500 filings and this would not look good for a Presidential Candidate who set up such a plan.
Most investors do not realize the extent to which these Bain interests, what are called “Non Standard Assets” by custodians, can now be purchased with IRA accounts. For example, if Merrill Lynch is the custodian, they will gladly allow key execs to put Bain interests in their self directed IRA’s. To do so however they must first get the funds out of the new ERISA regulated 401K profit sharing plan and that explains why the official retirement age for rollover purposes is 23.
The author of the two stories linked to above, Mark Maremont, which only address part I of the scheme, has a distinguished record of achievement spanning more than 10 years at the WSJ. This includes being awarded the Pulitzer Prize for his work regarding the backdating of stock options.