Who’s Protecting Your Retirement Account?

The recent collapses of two large banks, Silicon Valley Bank and Signature Bank, shook customers with cash deposits in banks and brought the workings of federal deposit insurance into the public eye. When financial institutions fail, are retirement accounts protected? Do you have reason to be concerned about your 401(k) or IRA nest eggs if your brokerage, mutual fund firm, or plan provider fails?

The FDIC does not insure 401(k) or IRA investments, but other organizations can. The good news is that, just as cash accounts maintained at FDIC-insured banks are safeguarded (up to $250,000 per depositor per bank), there are safeguards in place for owners of retirement funds. 

Let’s start with what the FDIC does and does not cover regarding retirement plans. 

The FDIC does not insure securities.

The primary distinction between a savings or checking account and a retirement account is that money in 401(k)s, IRAs, and other retirement savings vehicles are usually invested in assets such as stocks, bonds, and mutual funds. 

FDIC insures up to $250,000 on savings accounts, checking accounts, and certificates of deposit (CDs) which may be used in self-directed retirement plans like your 401(k)s and IRAs. However, the agency does not protect money invested in securities, even if the plan is linked with an FDIC-insured bank.

Let’s assume your 401(k) at work has a balance of $400,000, with 50% invested in equities, 25% in bonds, and 25% in a money market account. Only $100,000 in money market funds would be insured by the FDIC.

The FDIC also does not protect you from drops in the value of your investments caused by market movements.

Who safeguards your retirement?

So, who safeguards the majority of your retirement savings? Fortunately, governmental and private financial authorities have knitted a safety net for the money you have invested in financial markets. 

One example would be the Securities and Exchange Commission (SEC) in the United States, which enforces Rule 15c3-3, sometimes known as the Customer Protection Rule, which compels brokerage companies to keep their clients’ assets separate from their own, keeping them secure from corporate blunders. 

Furthermore, the Financial Industry Regulatory Authority (FINRA), an industry-run watchdog organization, monitors brokers to ensure they handle investors fairly and honestly.

If you are concerned about a bank or financial institution where you’ve invested retirement assets failing, you can always spread your money among different financial firms, says Ryan Brown, a partner at Southfield, Michigan-based financial firm CR Myers & Associates. He argues that it makes sense to diversify. 

If your employer declares bankruptcy?

If your firm has a 401(k) and declares bankruptcy, your assets are protected by the Employee Retirement Income Security Act or ERISA. 

This federal statute from 1974 mandates retirement plans to appropriately pay promised benefits and to keep retirement plan assets distinct from the sponsoring company’s business assets. 

According to the Employee Benefits Security Administration of the United States Department of Labor, funds for retirement plans must be held in trust or invested in an insurance contract, and creditors cannot claim the funds.

If your brokerage goes under?

This is uncommon, but if a collapse occurs, your money and possessions should be protected and kept out of harm’s way. Because the Securities Investor Protection Corporation (SIPC), a nonprofit membership organization created by federal law, protects most investment, brokerage, and retirement account assets.

If a brokerage fails without foul play and all client assets remain intact, it is normal for the SIPC to arrange to transfer the firm’s customer account balances to another company.

When a legitimate brokerage fails and client funds cannot be moved, the business is liquidated. The SIPC makes investors whole by issuing certificates for the lost equities or paying out the market value of the shares. According to a Charles Schwab study, since the organization’s foundation more than 50 years ago, 99 percent of qualified investors have returned their capital in cases handled by it. The problem arises when companies are not doing what they say, and you have a situation like Bernie Madoff. When there are criminal wrongdoings, you might not recover your funds. 

Coverage is limited.

The SIPC, like the FDIC with deposit insurance, puts financial restrictions on investor protection: Each client account is covered up to $500,000 for securities and cash (including a $250,000 cash-only limit). 

According to Fidelity research, the typical IRA contained $104,000 at the end of 2024, while the average 401(k) value was $103,900. The cap applies to each account that the SIPC believes to have “separate capacity,” defined as being distinct from other accounts at the same institution by type or owner. If you have distinct accounts, for example, a Roth IRA and a traditional IRA at the same brokerage firm, the SIPC will cover both accounts as distinct. Similarly, if a married couple has both a joint brokerage account and separate IRAs, each of the three accounts is insured up to the $500,000 maximum. If you have two brokerage accounts with the same institution, they are deemed “same capacity,” and their total assets are covered up to $500,000. 

According to the SIPC, customers of failed brokerage firms are generally protected when assets disappear from their accounts. It does not protect you if the value of the assets you hold falls or if you lose money because of faulty advice from a broker, including incorrect investment suggestions.

It also does not cover all types of investments. According to FINRA, the SPIC does not safeguard money invested in commodity futures, fixed annuities, currencies, hedge funds, or investment instruments (such as limited partnerships) that have not been registered with the SEC.