Coverage when brokerage, bank or pension fund fails
Safety in bank deposits
The Federal Insurance Deposit Corp., or FDIC, provides protection for insured bank deposits. Assets are insured by up to $100,000 per person, per account. Individual retirement accounts, or 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 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 whole process 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.
Protection for pensions
The Pension Benefit Guarantee Corp., or PBGC, protects pensions for 30,000 private (nongovernment) firms 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 smaller firms 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, says Hopkins. 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.