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Is Your Retirement Account REALLY Safe?

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Are your retirement assets safe? That's the question on everyone's mind after the 2nd and 3rd largest bank failures in US history. While it's not 2008, the reminder that risk is real has left many feeling uneasy. In this video, Johnathan Rankin, CEO of Theorem Wealth Management, breaks down the safety of retirement accounts in various scenarios.

Starting with workplace retirement plans like 401(k)s and 403(b)s, we discuss third-party administrators like Fidelity, Vanguard, or Principal administering these plans. Your investments are not directly into these companies, and your assets are protected by the Employee Retirement Income Security Act (ERISA). ERISA ensures plan assets are held in a trust separate from the employer's assets, providing protection against bankruptcy or mismanagement.

But what about retirement accounts held by banks or brokerage firms like IRAs or Roth IRAs? Learn about what differentiates between holding an account at a firm and investing in the firm itself. If you own a basket of investments within your traditional IRA and the company holding your account goes out of business, you still own those investments. The company is responsible for holding, valuing, and transferring securities, with protection from the SEC's Customer Protection Rule.

However, if you're invested in the firm itself through owning their stock, bond, or cash deposit, you have direct investment into the business. In this case, SIPC protects customers of SIPC-member broker-dealers in case of a financial failure of the firm. SIPC protects securities and cash in a customer's brokerage account up to $500,000, with up to $250,000 protection for cash in the account.

Read The Transcript

Over the past week we have had the 2nd and 3rd largest bank failures in US history. There is a lot that led to these failures and for those who are retired or close to it probably came with a bit of PTSD like I did as it brought flashbacks of 2008. To be clear, this isn’t 2008. Sometimes it takes a crisis to bring about big changes, and the bigger the crisis the bigger the changes. After 2008, regulators forced the banking sector to hold much larger amounts of capital to act as buffers, lend more conservatively and demonstrate their ability to deal with tough economic conditions. So this isn’t 2008, but this also doesn’t feel good either. Before regulators backstopped the deposits at the failed banks, the fear was that deposits above the FDIC limits would be at risk.

Even with the regulators backstopping customer deposits, this event has given people the reminder that risk is real. And the question that we are going to talk about in this video is whether or not your retirement assets are safe?

Hey everyone, I am Johnathan Rankin, the founder and CEO of Theorem Wealth Management where our goal is to help you maximize your retirement.

When it comes to the safety of your retirement accounts, it is easy to get confused with risk. When you invest your money into any security, whether that is a stock, mutual fund, ETF or any other investment, there is a risk to that investment. The risk we are covering today is what happens if the institution holding your money goes out of business.

Let’s start out with your workplace retirement plan. Whether that is a 401(k) or a 403(b). Most employers don’t manage retirement accounts on their own. They typically use a third-party administrator to do that. These are separate companies like Fidelity, Vanguard or Principal who administer the plan. You will often find that third-party administrators sometimes offer their own funds within the plan as well. So if your plan is offered by Fidelity, you may see a few Fidelity funds in the investment menu. Whether you invest in those funds or in funds offered by a different fund family within the 401(k) or 403(b), it is important to know that you are not investing directly into Fidelity or Vanguard or whatever company administers the plan.

The security of your assets is protected by the Employee Retirement Income Security Act also known as ERISA. This act put in a number of safeguards to protect against mismanagement and abuse. This Act made it law that plan assets be held in a trust and are separate from assets of the employer, the plan sponsor, the custodian, the trustee, the investment manager or the adviser. Your assets in the plan are protected from creditors of an employer, custodian or trustee if there was bankruptcy. Even if you personally file for bankruptcy, your 401(k) is safe as it is protected by ERISA.

Now that is for employer sponsored plans like 401(k)s and 403(b)s, but what about retirement accounts that are held banks or brokerage firms? These are accounts like IRAs or Roth IRAs or even your brokerage accounts. With these accounts, it is important to distinguish between holding your account at a firm versus investing in the firm that is hold your account. Let’s look at a few examples. If you have a traditional IRA at a firm and within that IRA you have a basket of investments. You own a mix of individual stocks, a few ETFs, a few mutual funds. In the event that the company holding your account goes out of business, you would still own the shares of those investments. The company holding your account is acting as a custodian and they are responsible for holding, valuing, and transferring securities. They are also responsible with receiving dividends and interest. To help protect investors, the SEC created the Customer Protection Rule that is a legal requirement for all broker-dealers where they must keep client securities segregated from broker-dealer securities. So if a firm were to fail, you would have your assets transferred to a new firm.

Where you have risk associated with a firm failure is if you are invested in the firm itself. That could be through owning their stock, owning a bond issued by them and possibly having cash on deposit at the firm. When you own the stock or bond of any company, it is an investment directly into the business and if the business fails, then so does that investment. To help protect investors, the SIPC was created. SIPC is an organization that protects customers of SIPC-member broker-dealers in case of a financial failure of the firm. If a firm closes, SIPC protects the securities and cash in a customer’s brokerage account up to $500,000. The $500,000 protection includes up to $250,000 protection for cash in the account.

As scary as times like this can be when we see large financial institutions failing, it can easily lead to thoughts about your own money and whether or not that is safe. I hope that this video helps you feel more confident in your retirement investments. If you are saving in a 401(k) or 403(b) make sure you check out this video where I go over how you can make the most out of your retirement account. I’ll see you there.

Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC.– Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. –  Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. – Theorem Wealth Management is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC. This communication has not been reviewed for completeness or accuracy, does not necessarily reflect the views of Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and is not a recommendation or endorsement of any product, service, or issuer. Third party posts do not reflect the views of Theorem Wealth Management or Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and have not been reviewed for completeness and accuracy. All further communications from this representative must be sent from and received by johnathan@theoremwm.com. For additional information, please refer to one of the following consumer websites: www.FINRA.org, www.SIPC.org.

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