If you have a 401(k) plan through your employer, the contributions are typically viewed as retirement savings. When markets and institutions falter, it’s natural to grow concerned over your nest egg. You may be wondering if your 401(k) funds are protected in a bank collapse. There are certain safeguards in place for these accounts, based on the types of investments you have and where you have them.
When considering how 401(k)s are impacted in a bank collapse, it can be helpful to know:
— Whether 401(k)s are insured.
— What type of protection your 401(k) funds have.
— Bank failures in U.S. history that caused a panic.
— What to do if you are concerned about your 401(k) funds.
[READ: 8 Rules for Managing Your 401(k) in a Recession.]
Are 401(k)s FDIC-Insured?
The Federal Deposit Insurance Corporation insures up to $250,000 of certain types of deposits at its member banks. These include checking accounts, savings accounts, money market accounts and certificates of deposits, or CDs. The FDIC does not insure investments such as stocks and bonds, mutual funds, annuities, and bonds.
The investments within your 401(k) could have specific protections if you have CDs or money market deposits at a FDIC-member bank. If your 401(k) holds capital market investments such as mutual funds for stocks and bonds, they won’t have FDIC insurance.
Some investments in your 401(k) may be protected in another way.
“Most 401(k) plans do not have FDIC insurance but may be covered by an ERISA fidelity bond,” says Dale Shafer, founder and financial advisor at Life Moves Wealth Management in Scottsdale, Arizona.
The Employment Retirement Security Act (ERISA) requires plan sponsors to act in the best interest of the participants and provides protection for individuals who hold retirement plans.
Are 401(k)s Protected in a Bank Collapse?
When you have a 401(k) plan through your company, your employer is typically the plan sponsor. The custodian of the account holds title to your assets for your benefit and reports to the IRS. The plan administrator carries out operations for the plan based on your instructions.
If you’re concerned about your 401(k) in the event of a bank collapse, the impact will depend on several factors.
If a custodian fails, there are measures in place to protect investors’ assets.
The Securities Investor Protection Corporation (SIPC) provides insurance coverage of up to $500,000 for securities and cash that are in custody of a brokerage firm that fails.
So, if the custodian were to fail, investors’ assets would be protected up to the insurance limit.
You could also look to see if a bank that failed is affiliated with administering your 401(k) plan.
“In many cases, 401(k)s are administered by separate investment institutions rather than banks,” Shafer says.
Some examples of these investment firms are Charles Schwab, Fidelity Investments, Principal Financial and Transamerica.
[READ: 10 Strategies to Maximize Your 401(k) Balance.]
Bank Failures in U.S. History
According to the FDIC, there were 565 bank failures from 2001 through 2023. Of these, more than half, or 297 failures, occurred during 2009 and 2010, as the U.S. went through the Great Recession. Many of these collapses were small or medium-sized regional banks.
In 2008, Washington Mutual Bank filed for bankruptcy, and the FDIC was appointed as the financial institution’s receiver. At the time of its demise, the bank had $307 billion in assets, $188 billion in deposits, and more than 2,300 branches across 15 states. The event marked the largest bank failure in U.S. history.
Then, in March 2023, the second- and third-largest bank collapses occurred. First, Silicon Valley Bank was no longer sustainable, followed quickly by Signature Bank. The events triggered the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corp. to step in and help.
The governing bodies announced bank members would have full protection and receive their funds, with no responsibility to cover any losses. While the quick action soothed fears, it left many Americans wondering what might happen next.
[READ: Factors to Consider Before Cashing Out a 401(k).]
How to Keep Your 401(k) Safe
Due to safeguards such as ERISA and SIPC, 401(k) plans have built-in layers of protection.
A bank failure is unlikely to impact your retirement funds if they are held in separate accounts and managed by a reputable custodian or investment firm.
If a prominent bank were to collapse, you might see lower returns on some of your investments for a time following the event. There are steps that could help protect your investments from fluctuating markets.
“Bank collapses can affect the overall market performance,” says Sean Burke, vice president and investment advisor representative at Kirsner Wealth Management in Coconut Creek, Florida. “It is important to diversify your portfolio which helps to spread risk over different asset classes and market sectors to avoid having too much risk in one sector of the market.”
Many 401(k)s hold mutual funds which may be able to help with this process. You can talk to a financial advisor to make sure your portfolio aligns with your retirement goals.
Reviewed on Aug. 7, 2023: This article was previously published at an earlier date.
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Are 401(k)s Protected in a Bank Collapse? originally appeared on usnews.com
Update 08/07/23: This story was previously published at an earlier date and has been updated with new information.
