Is your money insured?
As an investor, you likely have financial accounts besides your retirement plan—perhaps a money market fund, credit union savings, a checking account.
You'll be glad to know that there are government safeguards for many of these accounts.
The current financial crisis has led to an expansion of government safeguards in place since the Great Depression. This fall, FDIC insurance was more than doubled, for example. This year's crisis has also spawned new programs, such as the one created to protect investors in money market funds.
Together the programs are designed to protect bank accounts, CDs, and some money market fund deposits against unusual losses due to the failure of an institution, such as a bank, brokerage, or money market fund. They do not, however, cover losses in more speculative market investments, such as stocks and bonds, which can be expected to fluctuate in value.
Your coverage at a glance
||Is protected by ...
||Up to this amount...
|Bank, savings assocation account
||Federal Deposit Insurance Corporation (FDIC)
||$250,000 per account
|Participating money market fund
||Treasury Guarantee Program*
||Shares in account September 19, 2008
|Credit union account
||National Credit Union Share Insurance Fund and other insurance vehicles
||$250,000 per account
||Pension Benefit Guaranty Corporation (PBGC)
||$54,000 per year if you retire at age 65, for example.
|Missing stocks and mutual funds***
||Securities Investor Protection Corporation (SIPC)**
||Securities up to $500,000; cash up to $100,000
*Covers assets on deposit at close of business September 19, 2008.
**Does not protect against investment losses.
***Only available for the assets held in your Vanguard brokerage account.
How the various programs protect you
Protection for bank deposits. The Federal Deposit Insurance Corporation (FDIC) helps insure money you have on deposit at covered banks as well as savings associations. Recent federal legislation temporarily raised the amount guaranteed from $100,000 to $250,000. (It is scheduled to return to $100,000 on December 31, 2009, for most types of deposit accounts.)
If you have deposits at more than one bank or savings institution, your accounts are insured separately, up to $250,000 per bank. Moreover, your coverage could exceed $250,000 at one bank or savings association if, in addition to your own individual account, you also own a joint account (say, with your spouse), or a revocable trust account, according to the FDIC.
Bank CDs purchased through Vanguard Brokerage Services® are covered to the standard FDIC limits.
The FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you purchased these products from a covered bank.
Vanguard mutual funds are not insured by FDIC provisions. In return for the potential rewards of investing in mutual funds, you are taking on risk, which can include the loss of principal.
You can get more information at the FDIC website.*
Protection for money market funds. This fall the federal government established the Treasury Guarantee Program for money market funds.
The program provides coverage to shareholders for amounts that they held in participating taxable and tax-exempt money market mutual funds as of the close of business on September 19, 2008. The program had been scheduled to expire on December 18, 2008, but was extended by the Treasury Department through April 30, 2009.
Vanguard has always managed its money market funds with care, knowing that diversification and the prudent management of credit risks and liquidity are among the best protections for a money market fund.
Nevertheless, trustees of the Vanguard funds decided to participate in the Treasury Guarantee Program because they believe it was a helpful step toward stabilizing the credit markets in general, which should benefit investors in all money market funds.
The program is intended to forestall a "run on the bank" mentality that has caused problems at some money market funds, in particular those used by corporations and other large institutions as cash-management accounts.
For any fund participating in the program, the coverage will be triggered if a fund comes under duress as a result of a credit problem or the inability to meet shareholder redemptions. Specifically, for the coverage to kick in, a participating fund's net asset value must fall below $0.995, forcing it to liquidate, which means selling all of its assets and redeeming all investors' shares.
The Treasury Department website* offers answers to frequently asked questions about its guarantee of money market funds.
Protection for credit union accounts. If you have money at a federal credit union your accounts are insured for up to $250,000 until December 31, 2009, by the National Credit Union Share Insurance Fund.
As with coverage for bank accounts, you may qualify for additional protection if, in addition to accounts you own yourself, you also own accounts with your spouse or another person, for example.
The National Credit Union Administration's website* offers more information on how these funds are protected.
If you have an account at a state-chartered credit union, chances are very good that you are protected as well. Still, you may want to check with your credit union to find out if it is state-chartered and specifically how your deposits are protected.
Protection for pensions. For more than 30 years, the federal government has protected workers and retirees against the failure of their defined benefit pension plans through the Pension Benefit Guaranty Corporation (PBGC). The PBGC does not cover defined contribution plans like 401(k) or profit sharing plans. In addition, the PBGC guarantees “basic” pension benefits, not all benefits—for example, health and welfare benefits are not covered.
How much a retired worker receives from the PBGC will depend, among other things, on his or her age at retirement and the plan's criteria for eligibility and payment. The PBGC's program pays the benefit provided by your pension plan up to the limits set by law. Because of the limits, some participants may receive less than the amount provided for by the plan while others may see no reduction in their pension benefits.
Below is an excerpt from the legal limits table showing the maximum monthly amount guaranteed under the PBGC’s program. Note that higher limits may apply for disability payments and additional limits may apply for certain types of plans. See the PBGC's website* for more information.
|Age at retirement
||Monthly joint and 50% survivor maximum
Source: Pension Benefit Guaranty Corporation
Note: The maximum benefit is lower for benefits starting at age 65 or under because younger retirees get more checks over a longer period of time. Similarly, maximum benefits are higher at age 65 and older because older retirees get fewer checks over their remaining years.
*Assumes both spouses are the same age.
Protection against failure of a financial firm. The Securities Investor Protection Corporation (SIPC) is a nonprofit corporation established by the federal government that provides limited protection, in certain circumstances, for securities and cash you hold in a brokerage account.
However, the coverage applies only when a firm shuts down because of financial circumstances and customer assets are missing or are otherwise at risk because of the firm's failure.
SIPC protection does not protect you from investment losses, and your brokerage firm must be a member of the SIPC program for you to be covered.
Vanguard Brokerage Services is a division of Vanguard Marketing Corporation. Vanguard is a member of SIPC, which protects securities customers of its members up to $500,000 (including $100,000 for claims for cash). Explanatory brochure available upon request at www.sipc.org.*
In addition, a private company provides for coverage of losses in your brokerage account that would exceed the SIPC limits. Neither SIPC or private coverage protects against loss in the market.
Vanguard mutual funds, including any Vanguard money market fund linked to your Vanguard brokerage account, are not covered by the SIPC.
This article is for educational purposes only and is subject to change. It is not legal advice.
Under the Treasury Guarantee Program:
- You are covered only for shares invested in participating money market mutual funds as of the close of business on September 19, 2008.
- Any money market shares you sold after that date are not covered by the guarantee.
- Shares you may have bought after September 19 are also not covered by the treasury program.
- If you close your account with a fund or broker-dealer, any future investments you make in the money market fund fall outside the guarantee.
- If the number of shares you hold fluctuates, you are covered for either the number of shares you held as of close of business on September 19, or the amount you have now, whichever is less.
- New investors in a fund aren’t included in the guarantee.
Vanguard Brokerage Services is a division of Vanguard Marketing Corporation, Member FINRA.
Diversification does not ensure a profit or protect against loss in a declining market.
Investments are subject to risk.
Bank deposit accounts and CDs are guaranteed (within limits) as to principal and interest by the Federal Deposit Insurance Corporation, which is an agency of the federal government.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
*When you access any of the sites mentioned in this article, you will be leaving our site. Vanguard is not responsible for the accuracy of information on third-party sites. Vanguard receives no remuneration for website links in this article.
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