Who Protects Your Money—and How Much?

Who Protects Your Money—and How Much?

May 08, 2023

You've probably been hearing a lot about the so-called “banking crisis” in America. It started in March with the colossal failure of Silicon Valley Bank (SVB), which was followed up shortly after with the collapse of Signature Bank.

Then, in April, First Republic Bank collapsed, becoming the second-largest bank failure in U.S. history.

In all of these situations, the Federal Deposit Insurance Company (FDIC) immediately took over these banks and sold off their assets to larger banks. No one who had deposit accounts with any of these banks lost a penny.

Yet, many banks are still experiencing record withdrawals this year. If you've been tempted to liquidate your own accounts, give some serious thought to this question: Is it really safer to keep your money in a bank than hide it in your mattress?

And what about the money in your investment accounts? Is it protected at all?

The answer to both questions is “Yes.” But with qualifications that need to be understood.

First things first

Let’s start with the big question: How safe is the money in your banking or investment accounts?

The basic answer is: Very.

All financial institutions in the U.S. are subject to strict federal and state regulations. When failures occur, all kinds of safeguards are in place that protect the value of most customers’ assets.

Banking protection

Nearly every bank and credit union in the U.S. is FDIC-insured. This insurance covers up to $250,000 in combined checking, savings, CDs and other deposit accounts you have with your bank.

Should you be concerned if you have more than $250,000 in deposits with a single bank? Well, if recent history is a guide you shouldn’t worry too much.

When SVB, Signature Bank and First Republic failed, the FDIC's actions ensured that all assets in every deposit account—including amounts over $250,000—were protected. This policy is likely to continue if more banks fail down the road, because not doing so could spark an even larger loss of faith in the U.S. banking system, which could have dire global economic repercussions.

But if you’re still concerned that the FDIC will change its “cover-everything” policy, you might gain greater peace of mind by spreading your cash deposits across several different banks, keeping no more than $250,000 with a single bank.

What about invested assets?

The story is a little bit different with cash deposits in investment accounts.

The FDIC generally insures the value of bank-held cash deposits of up to $250,000 in most employer retirement plan accounts, brokerage accounts and IRAs. However, it does not insure stocks, bonds or mutual funds you may hold in these accounts. That’s because the prices of these securities rise and fall. If a stock or bond becomes worthless, it’s not the responsibility of the FDIC to cover your losses.

Protection for brokerage accounts and IRAs

If you have a taxable or IRA brokerage account, chances are that it’s protected by the Securities Investor Protection Corporation (SIPC).

Nearly all brokerage companies are members of SIPC. Part of this membership involves purchasing SIPC insurance that protects up to $500,000 (including up to $250,000 in cash) in assets held in an investor’s account.

It’s important to remember that this insurance may only protect you if your brokerage company fails or allows unauthorized trades or transfers to occur through no fault of your own. It doesn’t cover any losses due to market-related factors or bad trading decisions.

The tricky part is that in some cases the $500,000 limit applies to an aggregated value of your accounts, while in other situations each account receives its own protection.

Here are a few examples, which assume that all brokerage accounts are established with a single company:

  • If you have two separate taxable brokerage accounts under your name, the $500,000 coverage might only apply to the aggregated value of both accounts.
  • If you have your own brokerage account and a joint brokerage account with your spouse, each account is insured up to $500,000.
  • If you have a taxable brokerage account and an IRA brokerage account under your own name, each account is insured up to $500,000
  • If you have a Traditional IRA and a Roth IRA under your own name, each account is insured up to $500,000.

All brokerage companies that allow investors to buy and sell stocks and bonds must have SIPC insurance. However, brokerage companies that only sell mutual funds or variable annuities might not be SIPC members. And only registered securities like stocks, bonds and mutual funds purchased through a brokerage account are SIPC-insured. Unregistered investment contracts; unregistered limited partnerships; fixed annuity contracts, currency, and interest in gold, silver, or other commodity futures are generally not insured. 

Before you open a brokerage account, look up the company to make sure it is a member of SIPC.

Employer-sponsored retirement accounts

Most 401(k) and 457 plan accounts that aren’t established with brokerage companies are generally not covered by FDIC or SIPC insurance. However, federal regulations require that all plan assets must be held in an independent trust separate from the employer, recordkeeper or plan administrator. 

The trustee, often a bank or professional trust company, is legally required to purchase insurance to protect these assets from fraud, embezzlement or misuse or from creditor claims should the employer declare bankruptcy. The trustee is also responsible for making sure assets in the trust are invested with outside investment managers in compliance with the directions of plan participants.

Note that 403(b) plans that use custodied mutual fund accounts or annuity contracts from insurance companies do not necessarily need to hold these assets in trust. 

Cash balances versus money markets

Many people are confused as to who insures cash or money market deposits held in banks or brokerage accounts. The answer is not always straightforward.

  • Cash balances in brokerage accounts are generally insured up to $250,000 by the SIPC. If these balances are “swept” into FDIC-insured bank accounts affiliated with a broker/dealer, they may also be insured by the FDIC.
  • Money market accounts opened at banks are insured up to $250,000 by the FDIC.
  • Money market funds offered by brokerage companies and retirement plans are not protected by FDIC insurance because they are investment securities whose share price could theoretically fall below $1. They are, however, protected by SIPC insurance.

A trustworthy financial system

Ever since banking reforms were enacted during the 1930s, there hasn’t been a single case of customers losing money in their checking or savings accounts when their bank failed, even at the height of the Savings and Loan crisis of the 1980s.

Likewise, very few brokerage customers have lost money due to the collapse of their broker. Even when Lehman Brothers failed in 2008, their brokerage clients didn’t lose a penny of their invested assets because of non-market-related events. And the SIPC claims that since 1970, 99% of investors got all of their invested capital back when their brokerage company failed.

In fact, the biggest losses most people suffer occur when they try to time the market or make big bets on cybercurrency and other purely speculative investments. Unfortunately, there’s no insurance to protect against impulsive investment decisions.

If you need clarification about how your cash or investments are protected, contact your bank or brokerage company or your financial advisor. 

Although we go to great lengths to make sure our information is accurate and useful, this material has been provided for general informational purposes only and does not constitute financial or investment advice. If you have questions about the security of your money you're saving or investing, speak with your banker or a financial advisor. 

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This article was authored by David Jaeger and Jeffrey Briskin. David is a financial advisor at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or djaeger@canbyfinancial.com  Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.

 

 

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