Asset Safety
Laurie A. Belew, MS,MBA
Given the recent turmoil in the U.S. financial system,many investors are concerned about the safety of their cash and money marketfunds. This presents us with an opportunity to review the asset protectionprovided by institutions such as the Federal Deposit Insurance Corporation(FDIC), the National Credit Union Administration (NCUA), the Securities InvestorProtection Corporation (SIPC), as well as the new program established by theU.S. Treasury for money market mutual funds. As this article goes to press (onOctober 23rd), it seems that the laws, rules, and regulations are changingdaily. We have done our best to stay on top of these changes and provide youwith up-to-date information.
Federal DepositInsurance Corporation (FDIC)
The FDIC insures all deposits at insured banks and savingsassociations, including checking, savings accounts, money market depositaccounts, and certificates of deposit, up to the insurance limit. It does notinsure money invested in stocks, bonds, mutual funds, money market funds, lifeinsurance policies, annuities, or municipal securities.
On October 3rd, FDIC deposit insurancetemporarily increased to $250,000 per depositor per insured bank throughDecember 31, 2009. (Previously the basic insurance amount was $100,000, and theinsurance amount for self-directed retirement accounts was $250,000.) SeparateFDIC coverage applies to deposit accounts held in different categories of ownership,e.g., Single Accounts, Retirement Accounts, Joint Accounts, and Revocable TrustAccounts. In essence, you may qualify for greater than the basic insuranceamount at one institution if you own accounts in each of these differentcategories.
§ Single Accounts are titled in only one person's name. All single accounts at the sameinstitution are added together and the total insured amount is $250,000.
§ Retirement Accounts are owned by one person and titled in the name of thatperson's retirement plan. The following plans are insured: Individual RetirementAccounts (including traditional, Roth, SEP, and SIMPLE IRAs), Section 457plans, self-directed defined contribution plans, and self-directed Keogh plans.All retirement plan accounts at the same institution are added together and thetotal is insured up to $250,000. Insurance coverage is not related to namedaccount beneficiaries.
§ Joint Accounts are owned by two or more people, and each person's share is insuredup to $250,000. Thus, a joint account owned by a couple may have up to $500,000of coverage. An individual's shares of all joint accounts at the same insuredbank are added together and the total insured amount is limited to $250,000.
§ Revocable Trust Accounts may be either payable-on-death (POD) accounts or livingtrust accounts. The trust owner receives $250,000 of insurance for the interestof each qualifying beneficiary, i.e., the owner's spouse, child, grandchild,parent, or sibling.
The most common ownership categories have been discussed above.For more details regarding how to apply the rules or for information regardingother ownership categories, please call us or consult the FDIC website. Visit www.myFDICinsurance.gov and use EDIEthe Estimator to learn more about your coverage.
On October 14th, the FDIC announced theTemporary Liquidity Guarantee Program, which provides two forms of protection.First, it guarantees certain newly issued senior unsecured debt, includingpromissory notes, commercial paper, inter-bank funding, and any unsecuredportion of secured debt. Instruments issued before June 30th, 2009would be protected until June 30th, 2012. Additionally, the newprogram provides unlimited deposit insurance coverage for non-interest bearingdeposit transaction accounts, which are mainly payment-processing accounts usedby businesses. This guarantee expires at the end of 2009.
National CreditUnion Administration (NCUA)
Similar to the protection afforded by the FDIC to memberbanks, the National Credit Union Administration provides share insurance toaccount holders at insured credit unions. As of October 3, 2008, share accountsare insured up to $250,000 until December 31, 2009. NCUA coverage is verysimilar to that provided by the FDIC. To help you better understand your shareprotection, the NCUA has provided an "Estimator" on its website.
As of October 3, 2008, share accounts are insured up to$250,000 until December 31, 2009. Coverage is applied on a per credit unionbasis, so the maximum coverage amount applies to accounts at each credit union.Separate coverage is available on multiple accounts if you have differentownership interests in different types of accounts. The ownership categoriesare similar to those defined by the FDIC: single accounts, retirement accounts,joint accounts, and revocable trust or payable on death accounts. The NCUAwebsite states that if a credit union fails, payouts are usually done within threedays from the time the institution closes its doors.
Treasury GuarantyProgram
In September 2008, the Treasury Department announced theestablishment of and opened a guaranty program for money market mutual funds.Investors in participating money market funds are protected against those funds"breaking the buck," or falling below the standard $1 net asset value. Theprogram will initially operate for a three month term, after which the Secretaryof the Treasury may choose to renew the program up to September 18, 2009.
Coverage is only provided to shareholders for the amountsheld in participating funds as of September 19, 2008. Both taxable andtax-exempt money market funds are eligible to participate. However, only thosefund companies who apply for and pay a fee to participate in the program areeligible for protection. Schwab, Fidelity, and Vanguard money market funds haveapplied for coverage under the program. You will need to contact otherinstitutions directly to determine if they are participating.
Essentially, the Treasury's guaranty program will protectwhatever amounts you held in a participating money market fund as of September19, 2008 as long as the program remains in effect.
Securities InvestorProtection Corporation (SIPC)
SIPC helps individuals whose money, stocks, and securitiesare stolen by a broker or put at risk when a brokerage fails for other reasons.While cash and securities are protected, commodity futures contracts andcurrency, as well as investment contracts, such as limited partnerships, areineligible for protection. SIPC provides up to $500,000 of coverage foraccounts held in each separate category, with a limit of $100,000 for cashclaims.
Are Your AssetsProtected?
As your financial advisors, we are concerned with ensuringthe security of your financial assets and data. We have selected financiallysound and experienced custodians - Charles Schwab & Co., Inc. and FidelityInvestments. Both are financially healthy institutions, and both have theinternal controls and business standards necessary to keep your assets safe.Your accounts held at both institutions are protected by SIPC insurance.
It is important that you be vigilant about protecting yourassets outside of Schwab and Fidelity before a problem strikes. Ensure thatyour banks and savings associations are FDIC insured. Credit unions should haveNational Credit Union Share Insurance. Membership in SIPC is automatic for brokeragefirms with few exceptions, but participation in the Treasury's money marketguaranty program is not automatic.
If you have concerns about the safety of your assets,please call us immediately.