Are retirement plans protected when financial institutions fail?

If a big financial institution fails, “you shouldn’t lose anything because the assets are registered,” says Steven Novack, a senior financial adviser at Altfest Personal Wealth Management in

New York City.  “It’s registered in your name. So as long as they haven’t done anything illegal, that stock should still be there and just gets transferred,” he says. “If someone does a

Bernie Madoff scam where they’re saying [they’re] buying the stock and it’s not really there, that’s more of an issue.” On the rare occasions when a legit brokerage goes belly up and

customer funds cannot be transferred, the firm is liquidated and the SIPC makes investors whole by providing certificates for the lost stocks or paying out the shares’ market value. Since

the organization’s inception more than 50 years ago, 99 percent of eligible investors have gotten their investments back in cases it handled, according to a report by Charles Schwab.

COVERAGE IS CAPPED As the FDIC does with deposit insurance, the SIPC imposes dollar limits on its investor protection: Each customer account is insured up to $500,000 for securities and cash

(which includes a $250,000 limit for cash only).  The average IRA held $104,000 at the end of 2022 and the average 401(k) balance was $103,900, according to research by Fidelity. The cap

applies individually for each account the SIPC considers “separate capacity,” meaning distinguished by type or owner from other accounts at the same institution. For example, if you have a

Roth IRA and a traditional IRA at the same brokerage, the SIPC covers them both, as separate accounts. Similarly, if a married couple owns a joint brokerage account as well as separate IRAs,

each of the three accounts would be covered up to the $500,000 limit. However, if you have two brokerage accounts at the same institution, they are considered “same capacity” and their

combined assets are insured up to $500,000.  “Most customers of failed brokerage firms are protected when assets are missing from customer accounts,” the SIPC says. It does not protect

against securities you own declining in value, or against losses caused by bad advice from a broker, including inappropriate investment recommendations. It also doesn’t cover every form of

investment. For example, as FINRA reports, the SPIC does not protect assets tied up in commodity futures, fixed annuities, currency, hedge funds or investment contracts (such as limited

partnerships) that are not registered with the SEC.