August 28, 2002
Cooperative Fund of New England Attracts Investment through Self-Directed IRAs
by William Baue
Self-directed IRAs offer a win-win situation for nonprofits, which benefit from low-interest loans,
and investors, who benefit from tax-friendly community investment.
The Cooperative Fund of New England
(CFNE), a community development loan fund (CDLF) that supports cooperatives, community based
nonprofits, and worker-owned businesses in the region, is confronting the consequences of its
"CFNE is getting pretty lent out," said Executive Director Rebecca Dunn.
"The high demand for our loans and many recent loan approvals have depleted our funds."
CFNE's need to increase its assets comes at an opportune moment, when its investment compares
favorably with recent returns of the bull market.
"We pay up to four percent, which at
this point isn't such a bad return," Ms. Dunn told SocialFunds.com. The recent corporate
governance scandals also make community investment in socially responsible loans, such as those
offered by CFNE, seem more attractive.
However, eliciting interest from investors can be
challenging. CFNE has traditionally relied on word-of-mouth networking to identify investors to
fund the loans. Ms. Dunn has sought to expand the avenues for locating potential investors.
In late July, Ms. Dunn appealed to the community development banking listserv, an online
discussion forum on community investing, for advice regarding alternative fundraising strategies.
Several respondents referred her to New Hampshire-based PENSCO Trust Company, which specializes in custodial and
administrative services for self-directed individual retirement accounts (IRAs).
individual has an old 401k from a former employer, or an existing IRA account, the Internal Revenue
Service code allows that individual to roll those funds into a self-directed IRA and then invest
those funds--and that's a key word, it is an investment--in whatever vehicle the Cooperative Fund
of New England serves up," said PENSCO Vice President Michael Scott.
which amounts to a loan, offers benefits to both investors and nonprofits.
"This is not an
early distribution; there is no penalty involved; and there is no income tax due today," Mr. Scott
told SocialFunds.com. "The growth from the investment that the nonprofit serves up is all earned
within the IRA and enjoys the same benefits, whether it be tax deferred if it is a traditional IRA,
or tax free if it's a Roth. So the individuals win and the nonprofit wins, by having use of the
funds for the good of the community. It's a win-win situation."
However, only a very
small percentage of PENSCO's business falls under the category of socially responsible investing.
"Virtually no one knows about it," said Mr. Scott. "Most financial institutions in the
U.S. absolutely will not touch self-directed IRAs. The cost of custodial work on an individual
basis like we do is enormous. The only way we can do it is that we have a huge volume nationwide.
This is all we do. We enjoy the economies of scale of streamlining the process. We would welcome
helping [nonprofits and investors] with it."
CFNE represents a secure investment, despite
the fact that the loans are not insured or collateralized. Instead, CFNE has established a
creative process to guarantee its social investment loans.
"Several social investors,
cooperative organizations included, have agreed to designate their funds as the first to assume
losses [to shield other investors from loss]," according to CFNE's website.
investors can have confidence about earning up to four percent on investments with CFNE through
self-directed IRAs while helping support local communities.
Other community development
loan funds would be prudent to consider following this model.