Is my account safe?
By: YBB Personal Finance
SENTIMENTS
That depends on the type of accounts & where they are held.
FDIC insures bank deposits up to $250K/ownership-category/bank. Deposits can be checking, saving (regular or online), money-market accounts & CDs. Limits apply to different ownership-categories – individual, joint, IRA, trust (including the POD/TOD), & a maximum of 5 trust/POD/TOD accounts are allowed. It’s easy to get around these limits by dealing with multiple banks; there are some institutions or firms that have special programs to distribute funds among the FDIC insured banks. A high-rate CD from a shaky bank will be redeemed or reissued at a lower rate in case the shaky bank fails.
NCUA for credit unions (CUs) basically does what the FDIC does for banks. Some CUs may have private insurance such as from the industry-supported ASI.
SIPC covers brokerage accounts up to $500K in securities that may include up to $250K in brokerage-cash; market losses are never covered. Securities include stocks, bonds, money-market funds, mutual funds, Treasuries, brokered CDs & options, but not commodity futures & warrants. Brokerage-cash may be proceeds from security sales, or the money in core/settlement account waiting to be deployed. Note that the SIPC is an industry-supported nonprofit, so its coverage, scope & procedures are quite different from those of the federal agencies (FDIC, NCUAA). Major brokerages also have private excess insurance coverage beyond the SIPC coverage.
If you keep brokerage-cash for too long, you may get a notice from the brokerage to do something with it, but it’s easy to just put that money into money-market funds or T-Bills or CDs until you figure things out.
Treatment of variously titled accounts by the SIPC may also be different from that by the FDIC. Under the SIPC guidance, many failed brokerages are taken over by other brokerages, but the danger is that the accounts would be frozen during the transition periods & that may create huge problems for open positions (shorts, options) that may be time-sensitive, or can blowup or expire unattended.
Note that brokered CDs are covered by the FDIC in case of bank failure & by the SIPC in case of brokerage failure. Be clear about the situations these different insurances cover.
RETIREMENT accounts are protected under the federal & state laws. The workplace plans (pensions, 401k, 403b) have the highest protections. These also have accompanying headaches or inconveniences for many transactions, but those are for your own protection & safety. The IRAs are protected only under the state laws which vary widely with the exception that federal protections continue to apply to rollover funds from workplace retirement plans. Keep this in mind when your state of residence changes. For simplicity, some like to keep Rollover IRAs separate from contributory IRAs (i.e., with personal funds). An IRA with multiple sources of funds (mixed/tainted IRA) may be frozen until the details within are sorted out.
MUTUAL FUNDS aren’t insured but are regulated by the SEC (securities regulator); the CITs (collective investment trusts) in workplace plans are regulated by the OCC (banking regulator). Besides registration & disclosure rules, mutual funds must have separate operations for portfolio management, administration & recordkeeping, & custody of securities. These operations can be by separate firms, or by different subsidiaries of the same firm. With several different players involved, each with licensing & reporting rules, it would be difficult to concoct fraudulent schemes. If mutual funds are held at brokerages (i.e., not at the fund firms), then the SIPC coverage applies.
ANNUITIES & INSURANCE have limited protections under the state insurance programs. But these programs are unfunded & their goals are some sort of workouts within the industry, or as a last resort, limited operations under state rehabilitation programs. These resolutions are more time-consuming than the fast bank workouts under the FDIC. You may not lose money, but it may be frozen at low rates for quite a while. So, deal only with insurance companies that are highly-rated by the rating firms A.M. Best, S&P, Moody’s, & Fitch.
Insurers provide guarantees that are as good as the companies themselves. Because annuities & insurance are long-term vehicles, unfortunate things can happen to good insurance companies & there have been some past accidents. There are limited options if your insurer gets into trouble. For annuities, you can attempt 1035 exchanges. Things are more difficult for insurance – new life or health insurance may require medical underwriting; replacing auto or home coverage quickly may be challenging.
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