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If I have $1000 on deposit at a bank, and the bank fails, then the government / FDIC will step in and make sure that I have my $1000.


I was looking at my 401K account and got to thinking... what would happen if there were some scandal and Fidelity announced it was insolvent, such as a bank could if too many loans go bad, or every depositor suddenly wants their money back...

I assume there is something equivalent for operations like Fidelity that hold the majority of our citizen's 401Ks? Is that SIPC? Is there a limit to this insurance like FDIC? Or is the model/regulation of 401K operation different from a bank which usually lends out a multiple of its deposits (and hence the reason it could if fail)?

I have my employer 401K with Fidelity and also two IRAs. It's convenient to see all the dollars at a single location, but it occurs to me that it might be like eggs in a single basket. I have no choice with the 401K, but I'm wondering if I would be better off moving the IRAs to another brokerage to spread my risk around.
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Events like 911 or Sandy remind us that major unanticipated events could conceivable shut down major players on Wall Street, for example. One would hope their records have good backup systems off site making it possible to reconstruct their records within hours if not sooner. But did they think big enough? What about a major earthquake or nuclear war? Ouch.

Yes, SIPC protects your assets in a brokerage account. At some point some level of diversification adds peace of mind and gives you more choices in an emergency. Let's hope the need does not arise.

Runs on the bank are not usually a problem for brokerage firms or mutual fund companies like Fidelity. Cash withdrawals force them to sell the stock in their funds. And that results in falling prices for mutual fund shares.

The risk for brokers comes mostly from short selling. People borrow shares from the broker to sell short. They are sold under a margin call if value falls below minimums, and short seller is responsible for any losses. But in a market crash that wipes out the short seller, can they sell soon enough and can they collect losses from the short seller? SIPC insures your assets in this case and protects from disappearance of your shares.

SIPC has specified limits for the amount it insures, but many broker carry additional private insurance. The limit of that insurance is a good question to ask your broker.
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I do not believe that the short sellers are the major risk to the brokerage. Short sellers of equities make profits when the market goes down, thus they rarely do poorly when markets crash. Overleverege on the long side is much more of a problem, especially if the firm uses proprietary trading on the long side. Overreliance on derivatives to hedge these risks may cause a cascade of counterparty failures leading to market failure. Luckily for the too big to fail the Fed and the US treasury will underwrite the leverage with our tax dollars to prevent the embarrassment this disaster may cause.
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There are several things to consider when talking about the safety of your 401K plan/investments. First, and foremost, the assets in your 401k plan are held in a trust - with a trustee, who has a fiduciary obligation to safeguard the assets. The trustee (institutional or individual) is personally liable for breaches of their fiduciary duty - including the duty to safeguard. Now, that manifests itself in a duty to invest the assets with a reliable and trustworthy investment provider, and theoretically, at least, should perform due diligence periodically on the provider's ability to maintain solvency, and ensure a return of the investments/proceeds when necessary. If they don't, well, that would be a breach.

Even if your plan uses Fidelity's trust company as trustee, the trust company is an independent entity from the broker/dealer, investment manager, and distributor that most think of when they say "Fidelity." It is also subject to banking regulators - depending on how it is chartered, which could be state banking regulators, the OCC, and others.

Finally, Fidelity as a custodian of assets in accounts is subject to SEC oversight, and has SIPC and PRIVATE insurance to cover losses as a result of insolvency.

Keep in mind, though, that your investment in "mutual funds" is an investment in separate independent investment companies - distinct from Fidelity itself (even if they carry the name "Fidelity." Fidelity the custodian could go belly up - but you wold retain your interest in the mutual fund itself - although it may be time consuming to get access to your investment (first through the trust, then through the receiver of the corpse of Fidelity).

Suffice it to say, unless you have a fly by night trustee, or a dishonest individual trustee,handling your 401(k), you are pretty well protected....
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Some interesting points, some of which I was thinking of, and others I was not.

1) Employer
2) 401K company (e.g. Fidelity)
3) Mutual Fund (e.g. Fidelity Funds)
4) Individual Stocks (e.g. Apple, Microsoft, etc)

I assume the above is roughly the chain involved in a 401K?

I don't trust my employer very much... I hope I'll receive a paycheck each pay period, but they perform layoffs each quarter and their most recent precedent has been to notify on payday that this check (which is payment for the last 2 weeks of work) is your last, you will receive no severance, your medical/dental benefits are done as of midnight unless you COBRA, you will receive a check for your saved vacation pay via US Mail within a month, have a nice life.

My original question was regarding #2, the entity that holds the stocks/mutual funds... in essence my question was, is there a government backed insurance that will make good on any securities they are holding in my account. It sounds like there is some sort of a mix of government and private insurances. To be honest, I don't know how much I trust private insurance to pay in the situation of major banking failure because the insurers may be sunk as well. The US Government (such as it is) the only one I truly trust, and mostly because they can print/borrow additional money on demand.

Regarding #3, I had thought about this aspect as well, but decided I don't know enough about the mechanics/pricing of Mutual Funds to ask a relevant question.

Over all in the event of major war, epic disaster, etc, I'm assuming most everyone is screwed and then Bullets, Beans & Band-aids are the true currencies for a while at least...

So my concern was mostly regarding scandal and internal screw ups at the brokerage that holds my accounts.
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ems79,

You wrote, My original question was regarding #2, the entity that holds the stocks/mutual funds... in essence my question was, is there a government backed insurance that will make good on any securities they are holding in my account. It sounds like there is some sort of a mix of government and private insurances. To be honest, I don't know how much I trust private insurance to pay in the situation of major banking failure because the insurers may be sunk as well. The US Government (such as it is) the only one I truly trust, and mostly because they can print/borrow additional money on demand.

Regarding #3, I had thought about this aspect as well, but decided I don't know enough about the mechanics/pricing of Mutual Funds to ask a relevant question.


My understanding is that there is no official government insurance for fraud or default by a mutual fund company or a 401k trustee. There may be private insurance held by the trust or fund company though. And as mentioned, some companies like Fidelity might be considered too big to fail; but that's speculation and not an official government commitment.

Some 401k plans also contain self-directed brokerage options. The broker-held portion of the account should have SIPC coverage. SIPC coverage only guarantees you will recover the securities you held in the account at some future date. It does not guarantee when, nor does it insure against losses in those investments during that time. Finally, the brokerage is [or should be] a legal entity separate from the 401k trustee - even if they're both owned by the same holding company.

Finally, So my concern was mostly regarding scandal and internal screw ups at the brokerage that holds my accounts.

Does a broker actually hold your accounts? My employer uses Fidelity. My 401k-held mutual funds are not in a Fidelity brokerage account.

Here is Fidelity's web page concerning this topic. http://personal.fidelity.com/global/content/protecting-our-c... This should tell you what is covered and how. If you don't see your assets mentioned there, you should assume they are not.

Fortunately I'm pretty confident in Fidelity. Given what I know these days and if I worked for a small start up (again), I might be reluctant to contribute to a 401k if the trustee were fairly small. Of course even big companies experience fraud and some even collapse from mismanagement, so its not like I'm saying we're completely safe...

- Joel
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I still think you are asking the wrong question. Between 1 & 2 is the TRUST with a TRUSTEE. In reality, you "own" nothing at Fidelity. The trust is the legal owner. You are a beneficiary of the trust which is the owner of the assets held at Fidelity. The trust, as investor, is the protected party under the SIPC and private insurance that Fidelity purchases to cover it's customers - and you benefit from that.

In addition to being the beneficiary of the protections Fidelity has in place, you have the protections of the trust - which is separate from your employer (although the trustee may be an individual who you think of as your employer - it is vastly different in a legal sense).
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