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Are Retirement Plans Protected When Financial Institutions Fail?

The FDIC doesn’t insure 401(k) and IRA investments, but other agencies can safeguard your nest egg

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The recent failures of Silicon Valley Bank and Signature Bank rattled people with cash deposits at banks and made the workings of federal deposit insurance household knowledge. 

But what about retirement account holders? Do they have reason to fear for their 401(k) or individual retirement account (IRA) nest eggs if their brokerage, mutual fund company or plan provider fails?

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The good news is that just as cash accounts held at banks insured by the Federal Deposit Insurance Corporation (FDIC) are protected (up to $250,000 per depositor per bank), there are safeguards in place for owners of retirement accounts. 

Let’s start with what the FDIC covers, and what it doesn’t, when it comes to retirement plans. 

The FDIC does not insure securities

The main difference between a savings or checking account and a retirement account is that the money in 401(k)s, IRAs and other retirement savings vehicles are typically invested in securities such as stocks, bonds and mutual funds

Self-directed retirement plans like 401(k)s, individual retirement accounts (IRAs) and Keogh plans may include deposit products such as savings accounts, checking accounts and certificates of deposit (CDs), and these are FDIC insured up to $250,000. But the agency does not cover money invested in securities, even if the plan doing the investing is affiliated with an FDIC-insured bank.

Let’s say your 401(k) at work has a balance of $400,000, with 50 percent invested in stocks, 25 percent in bonds and 25 percent in a money market account. Only the $100,000 in the money market would be covered by the FDIC.

The FDIC also does not offer you any protection from declines in the value of your investments due to market fluctuations.

Enter the regulators

So, who protects the bulk of your retirement savings? Fortunately, there is a safety net for money you have invested in financial markets, woven by public and private financial regulators. 

For example, the U.S. Securities and Exchange Commission (SEC) maintains Rule 15c3-3, better known as the Customer Protection Rule, which requires that brokerage firms keep customers’ assets separate from their own and thus safe from corporate stumbles. 

In addition, the Financial Industry Regulatory Authority (FINRA), an industry-run watchdog agency, oversees brokers to make sure they’re treating investors fairly and honestly.

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If you’re stressed out about a bank or financial institution where you’ve invested retirement assets possibly going under, you can always reduce risk and potential headaches by spreading your money among different financial firms, says Ryan Brown, a partner at Southfield, Michigan, financial firm CR Myers & Associates. “It does make sense to diversify if this is keeping you up at night,” he says.

There are a few scenarios to consider. Here’s what you need to know.

If your employer goes bust

If you have a 401(k) through a company and it files for bankruptcy, your assets are protected by the Employee Retirement Income Security Act, or ERISA. 

This 1974 federal law requires that retirement plans adequately fund promised benefits and that retirement plan assets be kept separate from the sponsoring company’s business assets. 

“The funds must be held in trust or invested in an insurance contract,” according to the U.S.Department of Labor’s Employee Benefits Security Administration, and “the employers’ creditors cannot make a claim on retirement plan funds.”

If your brokerage fails

This is rare, but if a meltdown does occur, your money and assets should be shielded and out of harm’s way. That’s because most types of investment, brokerage and retirement account assets are protected by the Securities Investor Protection Corporation (SIPC), a nonprofit membership organization established by federal law.

If a brokerage collapses but no foul play is involved and all customer assets are still intact, it’s customary for the SIPC to arrange the transfer of the firm’s customer account balances to a different company. 

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If a big financial institution fails, “you shouldn’t lose anything because the assets are registered,” says Steven Novack, a senior financial adviser at Altfest Personal Wealth Management in New York City. 

“It’s registered in your name. So as long as they haven’t done anything illegal, that stock should still be there and just gets transferred,” he says. “If someone does a Bernie Madoff scam where they’re saying [they’re] buying the stock and it’s not really there, that’s more of an issue.”

On the rare occasions when a legit brokerage goes belly up and customer funds cannot be transferred, the firm is liquidated and the SIPC makes investors whole by providing certificates for the lost stocks or paying out the shares’ market value. Since the organization’s inception more than 50 years ago, 99 percent of eligible investors have gotten their investments back in cases it handled, according to a report by Charles Schwab.

Coverage is capped

As the FDIC does with deposit insurance, the SIPC imposes dollar limits on its investor protection: Each customer account is insured up to $500,000 for securities and cash (which includes a $250,000 limit for cash only). 

The average IRA held $104,000 at the end of 2022 and the average 401(k) balance was $103,900, according to research by Fidelity.

The cap applies individually for each account the SIPC considers “separate capacity,” meaning distinguished by type or owner from other accounts at the same institution. For example, if you have a Roth IRA and a traditional IRA at the same brokerage, the SIPC covers them both, as separate accounts. Similarly, if a married couple owns a joint brokerage account as well as separate IRAs, each of the three accounts would be covered up to the $500,000 limit. However, if you have two brokerage accounts at the same institution, they are considered “same capacity” and their combined assets are insured up to $500,000. 

“Most customers of failed brokerage firms are protected when assets are missing from customer accounts,” the SIPC says. It does not protect against securities you own declining in value, or against losses caused by bad advice from a broker, including inappropriate investment recommendations.

It also doesn’t cover every form of investment. For example, as FINRA reports, the SPIC does not protect assets tied up in commodity futures, fixed annuities, currency, hedge funds or investment contracts (such as limited partnerships) that are not registered with the SEC.

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