There are safety nets to catch you when your financial institution fails, but how much protection you have depends largely on the kind of assets you own and where you hold them, be they certificates of deposit, a pension plan or a checking account.

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As some of Wall Street’s most venerable firms topple like dominoes, even the most hardened individuals are wondering if their assets are adequately protected.

Officials and other experts were quick to assure investors that money is safe. Investors do get some measure of protection when the big banks and brokerages fall, and also if their pensions get terminated.

“People don’t need to be panicking. Unless you’ve had some massive fraud and conversion, and the brokerage is stealing money — and there’s no evidence of that — the funds should still be good,” says Mark Maddox, former securities commissioner for the state of Indiana and investor attorney.

The Securities and Exchange Commission said Lehman Brothers customers would be covered under SEC rules, including insurance by the Securities Investor Protection Corporation (SIPC).

That’s all well and good. But how do the SIPC and other agencies protect you?

As it turns out, there are safety nets to catch you, but how much protection you have depends largely on the kind of assets you own and where you hold them, be they certificates of deposit, a pension plan or a checking account.

Brokerage accounts

Security for brokerage accounts SIPC is funded by private “member” firms. Brokerage losses, including 401(k) and other retirement plans held at, for example Fidelity or Vanguard, are protected by SIPC up to $500,000 per person, per account. Of that amount, up to $100,000 cash losses are included. If you have, say, a retirement fund and a “rainy day” fund at a brokerage, each of those accounts would be protected up to the $500,000 threshold, says SIPC President Stephen Harbeck.

To qualify for SIPC protection, your brokerage must be a member. Most firms are. In fact, firms that are registered brokerages with the SEC “are virtually required to become members of SIPC,” Harbeck says.

In the event your brokerage firm goes out of business, the SIPC wouldn’t likely be involved in making you whole (unless funny business, such as fraud, was involved). Your holdings would likely be transferred to another brokerage firm, where you could lay claim to them. If fraud was the problem, then the SIPC would step in and oversee the transfer of any remaining assets as well as replace any missing securities.

Bank deposits

The Federal Deposit Insurance Corp., or FDIC, provides protection for insured bank deposits. Assets are insured by up to $100,000 per person, per account. Individual retirement accounts, such as IRAs, Roth IRAs and SEP IRAs, owned by one person at a bank are protected up to $250,000 total as long as they’re invested in certificates of deposit or are held in cash. Joint accounts are protected up to $100,000 per person.

That said, there are some holes in the FDIC safety net.

If assets exceed the $100,000/$250,000 limits, uninsured funds may never be reclaimed or just partially reclaimed.

“What the FDIC tries to do is get a healthy institution to take over all of the deposits. When it can’t, we try to get them to take over the insured deposits,” says LaJuan Williams-Dickerson, spokeswoman for the agency. “When customers have uninsured monies, they’re given a receivership certificate. The FDIC then sells (a failed) bank’s assets and makes payments in equal shares to holders of those certificates.”

Moreover, investment products are not traditional deposits, even if they are bought and sold at banks. Thus, the FDIC does not insure investments, including those held in IRAs, such as stocks, bonds, mutual funds, annuities, or municipal securities, even if they were bought from an FDIC-insured bank. Instead, these securities would be protected by the SIPC in the event that a bank’s member brokerage or subsidiary goes under.

Treasury bills, notes

Treasury bills and notes are protected by Uncle Sam, even if you buy them from a bank that’s gone under. You’ll want to get documentation from the FDIC, or from the so-called “acquiring bank” that takes over a failed institution, proving you own the security. You can then redeem the Treasury at a Federal Reserve Bank or wait for it to mature, at which point you get a check from the acquiring bank.

If this makes you squeamish, you can try to keep from getting caught up in a bank failure by checking up on the health of your bank using Bankrate’s Safe & Sound star ratings.


The Pension Benefit Guarantee Corp., or PBGC, protects pensions for 30,000 companies in the event of a bankruptcy or when a business can’t continue to sponsor its plan.

It does not protect defined contribution-retirement plans that employees fund, such as 401(k) or 403(b) plans. Pensions funded by companies with fewer than 25 employees generally aren’t covered by PBGC, either, says PBGC spokesman Marc Hopkins.

Employees can find out from their benefits department if their company is PBGC protected.

The PBGC offers coverage for basic benefits in the event an employer goes belly up or the plan fails. Basic coverage includes pension benefits at retirement age, most early retirement benefits, annuity payouts for heirs and some disability benefits.

Benefit amounts are set by Congress each year. The maximum benefit for plans that terminate in 2008 is $51,750 annually — or $4,312.50 a month — for someone who is age 65. Benefits are lower for early retirees.

If the PBGC took over a plan in previous years, annual payouts are smaller. For example, the annual maximum payout for a pension that folded in 2007 was $49,500, Hopkins says. Benefits are not adjusted for inflation.

PBGC also does not guarantee “extras,” such as vacation pay, severance or disability benefits when a disability occurs after a pension plan goes bankrupt.

To date, 84 percent of participants received their full plan benefit, according to a PBGC study. “Airline pilots, who had richer plans, and steel companies that had ‘shut down benefits’ for extra funds if a factory closed — those supplemental benefits weren’t covered,” Hopkins says. “We work to ensure there’s no interruption of benefits.”

You don’t have to wait for bad news to see if your plan will be protected. Employers must provide 60 days’ notice before a proposed plan termination. Meanwhile, employees always have the right to obtain information about their plan to see if it’s underfunded by requesting this information in writing.