Multiple 401k accounts to protect assets?

Submitted by corner t3_126tdpa in personalfinance

401k accounts are FDIC insured up to $250k, but SEC rules also state that assets held by brokerage can’t be used for their own funding. Is there a situation where insolvency of a brokerage would lead to FDIC money coming into play? If so, would splitting up 401k balance to multiple accounts under $250k be prudent? Most people don’t have to worry about the $250k cap for their checking accounts, but I feel like a 401k balance higher than that is a common enough scenario for some guiding principles on this.

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AcademicApplication1 t1_jeaq36g wrote

Your 4o1k is invested in different mutual funds likely, or one mutual fund, it depends on what you chose, the management company you employer contracts with to manage your account, is the holder of the certificate of investment in the mutual fund, if you wanted you could get physical copies of your shares in the mutual fund, you would have to pay every month because your share amount increases. The management company could go under but whoever takes it over still holds your deposit certificate.

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nkyguy1988 t1_jeaq9g7 wrote

401k accounts are not FDIC insured. They aren't bank accounts. Brokerages also aren't covered by FDIC.

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t-poke t1_jeaqcsg wrote

> 401k accounts are FDIC insured

No they're not. And a brokerage being insolvent wouldn't affect your assets. You own your shares of whatever you're invested in. If your brokerage failed, another one would take over.

The SIPC insures investment accounts - mostly uninvested cash, which you should have none of in a 401k.

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Mysunsai t1_jeaqkss wrote

> 401k accounts are FDIC insured up to $250k

No they aren’t. Possibly your specific 401k could have a cash fund at an FDIC insured bank, but that still wouldn’t be the 401k that is insured, it would be the bank.

SIPC insures brokers up to $500k, which would generally cover most 401k administrators.

You should note, however, that 401k assets do not belong to the administrator anyway, broker insolvency does not effect your 401k in any significant way. SIPC coverage only really comes in if the broker is pulling a Madoff, and stealing the money while pretending to invest it.

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Rave-Unicorn-Votive t1_jeaqli5 wrote

>401k accounts are FDIC insured up to $250k

If your 401k is in FDIC-insured vehicles, you're doing your 401k very wrong.

Assuming your 401k is actually properly invested and not sitting in a deposit account, the pinned megathread explains why your scenario isn't a concern.

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IPUPVP t1_jear55k wrote

Most brokers hold your stocks in "street name". That means your stocks are owned by the brokerage according to the books of DTCC (an entity that keeps track of who owns what stocks) as well as the company (in which you own stocks). Your ownership is only reflected in the books of your broker. So if your broker went bust and had no stocks to give you, you'd be screwed. That's where SIPC comes in - they will guarantee that you get those stocks.

Beware though, the SIPC will only give you the AAPL shares with some delay (say 1-2 months) but it won't guarantee any losses in the value of those AAPL shares in the meanwhile (even though you have no way to sell them).

SIPC also specifically does NOT prevent against employee fraud at your broker. That is a separately covered by something called a "fidelity bond".

The SIPC insures 500k worth of equity, options, cash, bonds and mutual funds positions (but not Futures). Cash is limited to 250k

Some brokers like Fidelity have an insurance coverage over and above SIPC

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