In most cases, a failing financial institution’s accounts will be bought by a successor firm. For example, when Washington Mutual failed in 2008, JP Morgan bought the accounts. The process is a non-event for most customers. You’ll hardly know the difference until they change the logo on the website or your statement.
Bank Failures
Banks are generally the safest place to have money. However, you need to make sure that your bank is FDIC insured and that your accounts are under FDIC insurance limits. If you’re covered by the FDIC, there’s no need to make a run on the bank.
Credit Unions
Credit unions are similar to banks, only they’re owned by the customers. They also enjoy protection backed by the full faith and credit of the US government if they are NCUSIF insured. Again, you need to make sure that you stay under insurance limits if you want to be safe.
Retirement Accounts
Retirement accounts at banks and credit unions are also insured. Generally you get up to $250,000 of coverage for all of your retirement accounts. All of your retirement accounts are added together for this purpose. However, credit unions allow you a separate $250,000 limit for Keogh plans - so you can get up to $500,000 of coverage if your accounts are properly structured.
Investment Accounts
You might have assets with firms that are not FDIC or NCUSIF insured. What happens if a brokerage firm or mutual fund company fails?
The Securities Investor Protection Corporation (SIPC) insures accounts at many of these firms. Check to see if the firm is a member of the SIPC, whether your investments are eligible, and whether you as an individual are eligible for coverage. SIPC does not insure against market losses - it only protects you if your investment firm goes insolvent and your money disappears.
SIPC insures accounts up to $500,000, but only $100,000 of that may be in cash. Some firms purchase supplemental coverage elsewhere to insure above and beyond those limits. SIPC is not guaranteed by the government.
Retirement Plans
For many people, their largest investment asset is in a company retirement plan such as a 401k. Check on your plan’s investment provider to see if they are insured by any of the entities above.
What if your employer goes bankrupt? Most retirement plan assets are held in a special trust and may not be used by the employer. However, if your employer falls on hard times (particularly a small business) you should make sure that nobody is fiddling with your account and that your deposits make it into the plan quickly.
If you participate in a nonqualified plan, you may lose benefits if your employer goes bankrupt. Some examples include nonqualified deferred compensation plans, 457(f) plans, and top-hat plans.
Do Your Homework
Hopefully this page provides some peace of mind and a starting point for your research. However, you need to verify the details (and existence) of any insurance. Check with the insurers and regulatory agencies to make sure that your institution is eligible, that you and your accounts are eligible, and that you are taking the proper steps needed to benefit from coverage. If you don’t do your own homework and verify this for yourself, your money is at risk.
