How Safe Is Your Money?

Credit Suisse recently report-ed a $4.7 billion loss from its dealings with one client, Archegos Capital Management. As a consequence, the bank slashed its dividend, reduced its share buybacks and announced key employees were leaving the firm.

The Swiss bank was one of several global financial firms that suffered loss-es from its dealings with Archegos but apparently suffered the largest losses. Only a few weeks earlier Credit Suisse also suffered losses from its dealings with the hedge fund Greensill Capital.Every market and economic down-turn raises fears among clients that their money might disappear in failures of financial services firms. Those fears rose in 2020 during the pandemic recession.

The recent failures of Archegos and Greensill make clear that some banks and other financial services firms carry hidden risks that even top management of the firms aren’t aware of. Even when the economy and markets are strong, individual firms can experience financial distress.

That’s why you periodically should review the financial safety of your assets and the protections that are in place.

In this article, I review the protections in place for the main types of financial assets and accounts.Traditional pensions, known as defined benefit pension plans, almost always are insured by a corporation created by the U.S. government, the Pension Benefit Guaranty Corporation (PBGC).

Documents you receive from the pension administrator should state whether or not it is insured by the PBGC or you can check at www.pbgc.gov.

The PBGC insures pensions up to a maximum monthly payout. The maxi-mum changes each year with inflation varies by the age of the pensioner. Check the PBGC web for the latest limits. For example, in 2021 the maximum insured amount for single-life annuity of a 65-year-old is $6,034.09 per month.

The PBGC receives no tax dollars and is not officially backed by the full faith and credit of the U.S. government.You shouldn’t have to worry about 401(k) plans and IRAs. These are separate accounts and trusts, not assets subject to the creditors of the trustee, custodian or sponsor of the plan. The assets owned in your account can lose value, of course, because of market changes.

Mutual funds and money market funds also are separate entities. Your risk in them is in the investments they hold. Even if the financial services firm that sells and manages the fund becomes insolvent, the assets of the 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 is said to have custody of the securities. The broker has its own records to determine which assets are credited to the 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. The SIPC becomes engaged 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 protect-ed from any declines that might occur during the liquidation process.

The SIPC’s main job is to ensure that assets are assigned to the right accounts. In the past, this could be a problem because failing brokerage firms often had poor record-keeping. But most brokers today have good digital records that make it much less likely there will be confusion over which assets should be assigned to each customer.

Accounts at banks are backed by the Federal Deposit Insurance Corporation (FDIC), which is backed by the full faith and credit of the U.S. government.

There’s a $250,000 limit on the guarantee of accounts, but the limit effectively is higher. An individual often can own multiple accounts at the same bank, with each account having a separate $250,000 limit. For example, a married person can have an individual account and a joint account with a spouse.

You also can have accounts at difference insured banks with each having a $250,000 insurance limit.You no longer must guess if you exceeded the FDIC insurance limit on your accounts. The FDIC established its online Electronic Deposit Insurance Estimator (EDIE).

You enter the 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.

Remember that FDIC coverage applies only to bank deposit accounts. It doesn’t apply to any investments or insurance contracts offered by a bank or held in an account at a bank.

Life insurance and annuities con-tracts have no backing set up by the federal government or by the industry. Instead, insurers are regulated and insured by the states. Each state has its own rules and its own guaranty fund. The guaranty funds have different insurance limits and rules about which accounts and amounts are covered.

The guaranty funds are funded by premiums charged to the insurers operating in a 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 the investments made by insurers and limit the investments of an insurer.

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 security of most insurers.

When an employer offers medical and other benefits to employees or retirees, these benefits usually aren’t guaranteed by any entity other than the employer and whatever insurer is 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 non-responsive participants.

You can check the regulatory filings of an employer plan at the agency’s website at www.dol.gov/ebsa.In recent years, there have been reports that banks can seize customer cash under the Dodd-Frank financial reform law enacted after the financial crisis. There are limits to this power.

The bank must be in a process known as “orderly liquidation.” In addition, only balances exceeding the FDIC insurance limits can be taken. Finally, the cash must be replaced with stock of the bank of equivalent value of the cash seized on that day. So, the ability of a bank to seize customer cash is limited, and you can avoid it. The bank must be in extreme financial distress, and you must have allowed your accounts to exceed the FDIC insurance limit.

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