Bank Failures and Your Retirement

In March this year there were several bank closures that made the news—Silicon Valley Bank, Signature Bank, and First Republic Bank to name a few. Understandably, these closures made people nervous about the safety of the assets held by their tax-qualified retirement plans. At IAI, we want our clients to feel confident that their retirement plan’s assets are safe!

Qualified retirement plan assets are required under the Employee Retirement Income Security Act of 1974 (ERISA) Section 403(a) to be held in trust, which means that the ownership of the assets remains with the plan. When plan assets are deposited in a financial institution like a bank or brokerage, that is typically a custodial role only and the financial company does not have ownership of the asset. As the trustee for a retirement plan, be sure to understand the agreement between the plan and the financial company which will be the custodian for the plan’s assets. It is common to set up a “trust account”, in which the financial company is also designated a trustee of the plan (although often with limited responsibility), and this can provide additional protections under ERISA.

Banks and brokerages are heavily regulated, and there are many laws protecting depositors and investors, including retirement plans whose assets are held in trust. For example, the U.S. Securities and Exchange Commission (SEC) rules require customer assets to be held separately from the general assets of the financial services company. Another protection is the Securities Investor Protection Corporation (SIPC), which is typically able to transfer an investor’s assets to a new custodian if a bank or brokerage fails. The SPIC protects securities, including cash in investor accounts resulting from the sale of securities, or held for future purchase of securities.

There are limits to the protection offered by the SIPC—there is a $500,000 limit protection for “missing” securities, and it does not protect against fraud or changes in value due to market fluctuations. Its protection of cash is different from that provided by the Federal Deposit Insurance Corporation (FDIC) for cash deposits at banks. However, the recent bank failures appear to be due to situations where depositors (not retirement plans with assets held in trust) withdrew their cash deposits, and poor investment choices made by the banks meant that they were unable to fulfill their depositors’ withdrawal requests. In such situations the SIPC should be able to protect of the custody function of the banks and protect investors.

Long story short: Recent headlines shouldn’t cause worry, even if you have placed your retirement plan’s money with one of the closed banks!

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