Know the Safety Nets and Other Protections for Your Money

Bank failures are in the headlines again.

Tighter Federal Reserve monetary policy or an approaching recession almost always lead to more bank failures.

To avoid being caught in a failure, of course do what you can to avoid a high-risk bank or financial services company. But banks and other financial services firms carry risks that aren’t apparent to outsiders and often aren’t recognized even by top management.

So, know the safety nets and protections available for your different types of financial assets.

The protection and safety net depend on the type of financial asset or account. Since banks are in the news, let’s start with them.

The Federal Deposit Insurance Corporation (FDIC) insures bank deposit accounts, and the FDIC is backed by the full faith and credit of the U.S. government.

There’s a nominal $250,000 limit per account on FDIC insurance. But an individual can increase the coverage by owning multiple accounts with different titles at the same bank, creating multiple $250,000 limits. For example, a married person can have both an individual account and a joint account with a spouse. Each account has a $250,000 limit.

Of course, when you have accounts at different insured banks each account has a $250,000 insurance limit.

You can determine the amount of your FDIC insurance by using the FDIC’s online Electronic Deposit Insurance Estimator (EDIE). You enter the names of banks at which you have accounts and the different types of accounts at each bank. The system tells you if you exceed the insurance limit.

EDIE is available free at edie.fdic.gov.

FDIC coverage applies only to bank deposit accounts. It doesn’t apply to any investments, insurance contracts or other products, even if sold by or held at a bank.

The assets in your 401(k) accounts and IRAs are separate accounts and trusts. They aren’t assets of or subject to claims of the creditors of the trustee, custodian, or sponsor of the plan. The asset values aren’t protected from a general market decline or financial troubles in one of your investments.

Mutual funds and money market funds also are separate entities. Like an IRA or 401(k), the risk is in the investments they own. Even if the financial services firm that sells and manages a fund becomes insolvent, the assets in a mutual and money market funds shouldn’t be swept into the bankruptcy estate.

Brokerage accounts are another matter. In most cases, the assets in a brokerage account aren’t in your name. They are in the name of the broker or a related entity. The broker has custody of the securities. The broker’s records determine how assets are credited to customers’ accounts.

No government agency insures brokerage accounts. Instead, the Securities Investor Protection Corporation (SIPC), which was created by and is funded by the brokerage industry, insures each account up to a maximum amount of $500,000 (but there’s a $250,000 limit for cash). Many brokers buy additional insurance.

The SIPC doesn’t protect the value of the securities. But when a broker is in liquidation, the SIPC works to restore to customers the assets and cash that were allocated to their accounts when the liquidation began. The values of assets are protected from declines that occur during the liquidation process.

Life insurance and annuities contracts have no backing by the federal government or the industry. Instead, insurers are regulated and insured by the states.

Each state has its own rules and guaranty fund. The guaranty funds have different insurance limits and rules about which accounts and amounts are covered. A guaranty fund is funded by premiums charged to insurers operating in the state. The states don’t promise to provide additional funding if a guaranty fund is exhausted.

The states provide most of their protection through regulations that require insurers to maintain minimum reserves and capital. The states also examine insurers’ investments and limit the investments an insurer can make.

When an insurer becomes troubled, the regulators usually arrange for other insurers to take over the assets and continue servicing the customer contracts to the extent feasible.

You can find more about any insurer selling insurance contracts in your state by checking with the office of the state insurance commissioner. Also, several private firms publish their assessments of the financial stability of most insurers. These include A.M. Best, Standard & Poor’s, Fitch, Moody’s, Kroll Bond Rating and Weiss. Most insurers, agents and brokers will provide safety ratings to customers and prospective customers.

Traditional pensions, known as defined benefit pension plans, usually are insured by the Pension Benefit Guaranteed Corporation (PBGC), and pension administrators are required to provide documents to participants that state whether they are insured by the PBGC. You also can check at www.pbgc.gov.

The PBGC insures pensions up to a maximum monthly payout that changes each year and varies by the age of the pensioner. Check the PBGC website for the latest limits.

The PBGC receives no tax dollars and is not officially backed by the full faith and credit of the U.S. government.

Medical and other benefits offered by employers to employees or retirees usually aren’t guaranteed by any entity other than the employer and any insurer involved.

The Employee Benefits Security Administration, an agency of the U.S. Department of Labor, regulates many employer benefit plans and seeks to restore benefits to participants when a plan and employer become insolvent. The agency also helps employers find missing or nonresponsive participants.

You can check the regulatory filings of an employer plan at the agency’s website at www.dol.gov/ebsa.

There are more details about the safety of different financial assets in my October 2020 episode of the Retirement Watch Spotlight Series. If you aren’t already a subscriber, check the Retirement Watch website for details on how to join.