Consumers Must Know the Rules to Protect Their Assets

Americans are scared about their money, a fear being reinforced every day as banks are closed, stock prices fall, home equity shrinks, and politicians fight over which financial institutions are "too big to fail" and which are going to be cut loose to live or die without government intervention. 

Former Federal Reserve Chairman Alan Greenspan said on ABC's This Week on Sunday that the present situation is "by far" the worst economic crisis he has ever seen, and it still has a way to go.  He said "let's recognize that this is a once-in-a-half-century, probably once-in-a-century type of event."

In the midst of this chaos there seems to be no safe place for savings or retirement funds and forget the idea that money should be working to earn more money.  People just hope to keep whatever they have left.

Putting cash under the mattress is the worst possible decision.  First, savings are dormant, not earning even the stingy 1 or 2 percent interest rate that banks are paying.  And there is no security.  Houses can burn along with the mattress and the money under it and count on the fact that someone will learn you have a large amount of cash on hand and may decide to take it.  Homeowners' insurance typically covers the loss of cash only at a very low limit, usually a few hundred dollars.  Such a limit, incidentally, also applies to other valuables such as jewelry or fine art.   

Hard investments such as gold, diamonds, or art also generate no income although there is a possibility of appreciation.  But again, where can they be safely stored?  Unless you have a trustworthy and knowledgeable advisor, purchase of these commodities might also set you up for a scam.

There are safe harbors, but making sure savings and retirement funds are protected takes some work.  Again the Internet comes to the rescue with a lot of information on the subject.

The three major insurers of financial accounts are:

The Federal Deposit Insurance Corporation (FDIC) for federally chartered banks.  Some states also provide additional insurance for state chartered banks.  Check with your institution about the latter.

The National Credit Union Administration (NCUA) provides coverage for accounts in federally charted credit unions through the National Credit Union Share Insurance Fund (NCUSIF).

The Securities Investor Protection Corporation (SIPC) maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms.

Each of these insurers limits their coverage to some degree.  Everyone has heard that the FDIC insures accounts up to $100,000 (as does the NCUA) but few people really know what constitutes an insured account.  FDIC and I presume NCUA insurance limits are set up more to protect the bank fund than the consumer and at every FDIC bank closing customers leave in tears after being told that some of their money, even though it was dispersed among accounts exactly as set up by bank personnel, has been lost.   Correctly structured, it is possible to have fully insured accounts totaling many times the $100,000** limits but proper guidance is crucial.  FDIC claims examiners are extensively trained but sometimes even their eyes cross at the complexity of the rules - please forget about taking the advice of an employee on the teller line.

The rule of thumb for both FDIC and NCUA insurance is the depositor is insured up to $100,000, not the account.  Therefore a checking account in a single name and a savings account in the same name are together insured for $100,000.  The insurance on retirement accounts was raised to $250,000 in recent years, and there are special rules for some types of accounts such as those with beneficiaries. 

Both FDIC and NCUA now sponsor websites to guide customers through the maze of rules.  The FDIC site - http://www.FDIC.gov/edie/calculator.html - has brief tutorials on how to set up multiple insured accounts but more helpful is an account estimator.  Depositors can enter the name of each of their banks, the type of accounts, and the current balance and receive a report detailing how much is covered in each account.

A similar estimator for insured credit union deposits can be found at www.webapps.ncua.gov/ins/.

SIPC insurance is very tricky.  First, it does not protect a stockholder if the value of a stock drops, even if the investor feels he was misled by his broker or possibly even the victim of fraud other than unauthorized transactions.  It is primarily designed to cover securities and cash when the brokerage firm goes out of business.  In that event the protection is capped at $500,000, $100,000 of which can be in cash.  When an SIPC member becomes insolvent, SIPC will ask a court to appoint a trustee to supervise the firm's liquidation and to process investors' claims.

Even though the SIPC fund was authorized by Congress, it is very unclear, at least to me, how much protection it really provides.  I urge anyone with securities or cash held by a brokerage firm to research the issue carefully.  Also, ask your broker if his firm is among those that carry additional private insurance policies to protect their investors.

** A technical note; at many bank closings the FDIC estimates the recovery they expect from liquidating the bank's assets and pay those with uninsured money a percentage of that anticipated recovery either at the closing or in installments as the liquidation proceeds.  Depositors, however, should not rely heavily on these funds.

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 an insured bank or savings association