There are plenty of ways to lose money in this world, so it’s important to know whether and how your money is protected against losses.
Fortunately, if a firm holding your money goes belly-up, you’re often (but not always) protected, at least to some degree, so the odds of watching 100% of your account balance disappear are relatively low. Even when Washington Mutual Bank failed in 2008—the largest bank failure to date—customers did not lose money, thanks to FDIC insurance.
Bank and Credit Union Failures
Banks and credit unions are generally very safe places to keep your money. You’re not exposed to market fluctuations, and most institutions are insured with backing from the U.S. government.
Sometimes banks fail. The investments they make don’t work out, and they no longer have the funds to meet customer demands. If there’s a run on the bank, things fall apart even faster. Fortunately, most troubled banks get bought by other banks, customers of the failing banks become customers of the buying banks, and usually, nobody loses any money. In many cases, customers hardly notice when a bank fails.
To ensure that your funds are as safe as possible, verify that your money is FDIC insured. If you use a credit union, your money is just as safe as long as it’s a federally insured credit union using NCUSIF insurance. Remember to keep your balances below the limits ($250,000 per depositor per institution) to limit your risk.
Retirement accounts in banks and credit unions are insured just like any other account. Your accounts might be combined when looking at the $250,000 limit, so don’t assume each account gets its own limit. (Your Traditional IRA and a SIMPLE plan may be combined, for example.)
Depending on how your accounts are structured, you might be able to get more than $250,000 covered at one bank, but you’ll want to verify that with the FDIC.
If your money is held with firms that do not offer FDIC or NCUSIF protection, you might still be protected. Many investment accounts offer Securities Investor Protection Corporation (SIPC) coverage. This coverage only protects you if your brokerage firm fails—it does not protect you against market losses or bad advice. SIPC coverage is good for up to $500,000 per account type. (Only $250,000 of that may be held in cash.)
FDIC and SIPC insurance protect different types of accounts, so make sure you understand which coverage applies to your assets.
Employer Retirement Plans
If you’re like many, your largest investment asset is in your employer’s retirement plan, such as a 401(k) or 403(b) plan. To find out about your protection, start by checking to see whether your account is insured by the FDIC insurance (which isn’t likely) or covered by SIPC.
If your employer goes bankrupt, your funds are generally protected. Most retirement plan assets aren’t held by your employer—they’re often in a special trust from which the employer cannot withdraw. However, if your employer falls on hard times, it’s a good idea to monitor your accounts: make sure that no withdrawals are being made, and that your contributions actually go into the plan every pay period.
If you participate in a nonqualified plan, such as a 457(f) or top-hat plan, you could very well lose money if your employer goes bankrupt. Those assets are considered property of your employer and might be available to creditors.
What if your 401(k) were to lose money in a market crash? Can you insure against that? Generally, no. Most 401(k) plans are not FDIC insured. Some plans offer one or two investment options within the plan that are FDIC insured, but most investment options are not.
Some employer plans offer products from insurance companies that might help you in a market crash, but don’t get your hopes up. Insurance protection (often in the form of an annuity) for 401(k) balances is not something the majority of employers offer. Those guarantees are only as strong as the insurance company making the guarantee, so you’re counting on the financial strength of that company with no government backing. What’s more, that protection comes with extra fees, expenses, and restrictions, so you’ll want to read through disclosures carefully before you start using it.
Ultimately, the closest thing you can get to a sure thing is a deposit (under the limits) in an FDIC insured bank account or NCUSIF insured credit union. The only risk is that, over long periods of time, inflation can affect your savings.