retirement

Asset protection when your brokerage, bank or pension fails

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.

But doing business with a SIPC-member institution isn't guarantee for an automatic bailout. Investors who have losses due to improper trading must prove they complained about how transactions were conducted. If you've done nothing to prove you objected to how assets were handled, SIPC "has to assume you assented to the trade," says Harbek.

William P. Thornton Jr., a lawyer at Stevens & Lee in Reading, Pa., represented a client against SIPC when Old Maple Securities failed. Thornton spent two and a half years in court before getting back roughly $100,000 cash from SIPC.

"SIPC typically hires a trustee, and they either grant or deny claims that were filed. Historically, there have been a high number of denials forcing investors to litigate with SIPC," says Thornton. "Every case is unique."

Safety in bank deposits 

The Federal Insurance Deposit Corporation, 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.

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"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.

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