Are 401Ks Protected in a Bank Collapse? What to Know About Retirement Funds

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  • The FDIC does not insure investments such as stocks, bonds or mutual funds, but deposits in a qualifying account such as a CD or money market are insured up to $250,000.
  • Traditional IRA, Roth IRA, SEP IRA and Keogh plans are all insured up to $250,000 if held at an FDIC-insured bank and kept in a qualifying account.
  • The Treasury, Federal Reserve and FDIC issued a joint statement on Sunday ensuring all impacted depositors would have access to their funds by Monday.

People invest money in various ways, especially to prepare for retirement; however, those investments may not be safe in the event of a bank collapse.

Three bank collapses in the United States in March have put investors on high alert and the volatility in the market caused panic, leading to a halt in trading of certain bank stocks on Monday. The federal government has assured depositors at Silicon Valley Bank, Signature Bank and Silvergate Bank that much of their traditional savings and checking accounts are safely insured, but, under Federal Deposit Insurance Corporation (FDIC) policy, retirement accounts pose a trickier situation.

On Sunday, Treasury Secretary Janet Yellen, Federal Reserve Board Chair Jerome Powell and FDIC Chairman Martin Gruenberg issued a joint statement ensuring all depositors would have access to their funds by Monday. President Joe Biden attempted to calm panic on Monday by reiterating that depositors would be made whole, but the administration's remarks did little to help struggling stocks. While the biggest hits were with First Republic Bank and Western Alliance, Charles Schwab also took a hit, falling by 12 percent on Monday morning. Schwab was one of the biggest names to have trading of its shares halted on Monday, prompting concerns about the stability of the company, which is known for its investment banking.

FDIC headquarters in Washington, D.C.
The Federal Deposit Insurance Corporation headquarters is seen in this October 1, 2008, photo in Washington, D.C. FDIC insures various investment accounts up to $250,000 if held at an insured bank. Getty

Schwab assured customers that the company was "well positioned" and stocks were up 9 percent at 10:45 a.m. ET on Tuesday.

Are 401(k)s Insured By The FDIC?

It's common for 401(k) accounts to invest in stocks, bonds and mutual funds, but their money won't be protected by the FDIC. Likewise, if someone invests in a bank stock that then fails, their investment won't be insured either. The FDIC does not insure investments, such as 401(k) funds or IRAs including stocks, bonds or mutual funds.

"Most 401(k) plans are not usually backed by insurance," American University finance professor Valentina Bruno told Newsweek in an email. "The Federal Deposit Insurance Corporation (FDIC) only covers deposit accounts. This means that if your 401(k) is invested in stocks, bonds, or mutual funds, you're not covered against those investments losing value."

However, if someone invests in a qualifying account such as a CD or a money market within an insured bank and that bank then fails, FDIC will cover up to $250,000 lost by the customer.

What Other Retirement Plans Are Insured?

Retirement accounts including traditional IRA, Roth IRA, a Simplified Employee Pension IRA and Keogh plans are insured up to $250,000 if the accounts are held at an FDIC-insured bank, according to the FDIC. However, the same contingencies applied as for a 401(k).

A person's IRA at an insured bank may be safe up to $250,000 if their money is placed in insured accounts such as money markets, CDs or an IRA savings, but if someone places their money into investment strategies such as stocks, bonds or mutual funds, their money is not insured.

"The FDIC insures savings accounts, insured money market accounts and certificates of deposit (CDs). The FDIC insures deposits only," Bruno said. "It does not insure securities, mutual funds or similar types of investments that banks and thrift institutions may offer."

If a 401(k) or other eligible retirement account is worth $100,000 and is 50 percent invested in stocks, 25 percent in bonds and 25 percent in a money market account, the $25,000 in the money market account would be covered by the FDIC if the bank goes under, according to Investopedia.

Newsweek reached out to the FDIC by email and phone for comment.

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