The FDIC doesn’t insure 401(k) and IRA investments, but other agencies can safeguard your nest egg
Published by: AARP
The recent failures of Silicon Valley Bank and Signature Bank rattled people with cash deposits at banks and made the workings of the federal deposit insurance household knowledgeable.
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?
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.
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.
Enter the regulators
So, who protects the bulk of your retirement savings? Fortunately, there is a safety net for the 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.
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.
- 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.
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.