Imagine reaching retirement age only to find out that the financial institution, which acts as a custodian of your 401(k), such as Fidelity, is in serious financial trouble and not in a position to pay you what it owes. All your decades of hard work would be wasted. That’s probably a nightmarish scenario you don’t want to deal with, which is why you may be asking yourself, “What kind of 401(k) insurance coverage does Fidelity or any other retirement account custodian offer?”
It’s worth noting that your Fidelity 401(k) account is not federally insured the same way, for example, your deposit at the local bank is. Because of the normal risks inherent in investing, insurance against loss of value is never provided. Instead, for companies like Fidelity, insurance for 401(k) accounts is available from both federal and private sources. This insurance coverage also covers other assets against broker theft or business failure.
Investment Insurance for Customers
Member firms, including Fidelity, participate in the Securities Investor Protection Corporation (SIPC). On its website, the SIPC states that its mission is to primarily protect investors in case their brokerage firm goes bankrupt or out of business.
Therefore, if Fidelity were to fail, the SIPC would arrange for a court-ordered trustee to liquidate the firm's assets and turn control of account assets over to another firm for administration. The SIPC also gets involved when assets are missing from customer accounts.
Private Insurance for Customers
According to the SIPC, it provides insurance coverage to the tune of $500,000 for securities (a money market fund is considered a security by the SIPC) and $250,000 for uninvested cash. However, many brokerage firms, Fidelity included, purchase private insurance over and above the insurance provided by the SIPC, since it is limited.
Fidelity reports that it has an aggregate $1 billion in "Excess of SIPC" coverage through Lloyds of London and other insurers.
Fraud and Loss Provisions
Although the Federal Deposit Insurance Corporation (FDIC) insures against the loss of value in bank accounts, the SIPC is not the "investment version" of the FDIC. Dollars do not fluctuate in value (foreign currencies excepted), and are considered risk-free.
However, that is not the case with a stock or mutual fund investment, in which the investor hopes to out-perform cash. For this reason, the SIPC also cannot insure you against purchasing a worthless investment or an investment sold to you by fraudulent means.
So, you may be wondering, “Is my Fidelity account FDIC insured?” Well, according to Fidelity, the uninvested cash balance in some of the customer accounts may be channeled to program banks where it is eligible for FDIC insurance. And if your balance exceeds $245,000, the money will be redirected to up to program banks so you receive maximum insurance coverage, which totals $1.25 million.
However, your retirement account must be eligible for this program. So, you need to contact a Fidelity customer service representative and inquire whether your uninvested cash balance qualifies for FDIC insurance coverage.
Considering Investment Alternatives
If your primary concern is to make sure you don't outlive your retirement assets, you can purchase an annuity upon retirement. Investor.gov describes an annuity as a contract between you and your insurance company that requires them to pay you some money.
Generally, an annuity is an insurance product that provides the owner with guaranteed income for a specified term, based on the value of the account and actuarial factors. Income is reduced when you add cost-of-living adjustments or provisions for a surviving spouse. Bear in mind, however, that annuities are expensive and you might get similar results more cheaply by just having your assets professionally managed.
Some 401(k) plans have begun to offer annuities as an investment choice, so check with your benefits representative or plan sponsor for more information.
Get Some Education
If you are concerned about market losses in your 401(k) account before you retire, your best protection might be education. Check with your benefits representative or with Fidelity directly to find out how you can invest in your 401(k) to maximize value and minimize risk. Learning how to invest well is easier than you might think.
Julia Thomson began writing professionally in 1996. Her work has appeared in "Stage Directions," "Phoenix New Times" and "The Valley Callboard." Thomson has expertise in investing and personal finance, with three brokers' licenses and certification as a budget counselor. She holds a Master of Music from Indiana University.