If Abigail Van Buren and Ann Landers had teamed up and become personal finance and investing experts -- and if they'd kept working into the podcast era -- one can imagine the result might have been a little bit like the Motley Fool Answers' monthly mailbag episodes. (Though they probably would have done less "awfulizing.") Certainly, there are plenty of us who could use some guidance in the money realm -- so many, in fact, that two advice givers are hardly enough. So for this podcast, hosts Alison Southwick and Robert Brokamp have brought back one of their more popular guests, senior analyst Emily Flippen, to chime in.
Speaking of Bro's penchant for awfulizing, in this segment, a listener poses a question about an unusual worst-case scenario: What happens to your holdings if the broker where you have your account goes belly up? On this front, there's good news, better news, a warning, and one piece of advice that will stand you in good stead if the unthinkable occurs.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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Alison Southwick: Our next question is from David. "My wife and I were discussing our retirement savings and have a question neither of us knew the answer to, but it seemed important. If the brokerage we have our 401(k) with went bankrupt, do we lose our 401(k)? How would we recover it?"
Robert Brokamp: That is a good question! Fortunately every broker has what's known as SIPC coverage. It's basically the FDIC equivalent for brokers. And it covers you up to losses if the company fails -- or in some cases commits fraud -- but there's a limit. Protection is $500,000, which includes $250,000 of cash. The good news is that most firms have more coverage. It's called SIPC excess coverage, and it's enormous. Vanguard Brokerage has coverage of up to $250 million per account. Fidelity has up to $1 billion per account, so you're probably covered.
Southwick: Who insures these? Is it one company that insures?
Brokamp: I don't know, but it sounds to me like a Lloyd's of London type of thing.
Southwick: I mean if Vanguard goes bankrupt, we have bigger problems than our 401(k).
Brokamp: Well, that's a good question! First of all, it actually doesn't happen that often. I looked at how many cases are now pending with the SIPC, and there's only four. Legend Securities, Western Capital [Resources], Lehman Brothers, and Bernard L. Madoff Investment Securities. I don't think it happens that often, so maybe it doesn't actually cost that much to insure all this. Regardless, there is coverage. Also, with a 401(k), any of the qualified employment plans are covered by the ERISA laws, which are governed by the Department of Labor, so they have a whole other layer of protection.
All that said, if something happens, it's a big pain. The authorities come in, swoop into the brokerage, get all the accounts, and see who owns what, so it's really important for you to have documents. Keep your paperwork, because if the brokerage was a complete mess and they don't have enough paperwork to establish what you own, you have to be able to prove it, and there are limits to how long you have to make a claim. For example, in the case of SIPC, you have to make a claim within a year, so as soon as you know that there's trouble, make your claim, contact the relevant authorities, and make sure you get your name on the list.
Southwick: With something like Bernie Madoff, though, it wasn't like they just went bankrupt. It was fraud.
Brokamp: It was fraud.
Southwick: So you may have a piece of paper that says you had a bajillion dollars, but in actuality you have $0. Does insurance still kick in? Even in the case of fraud?
Brokamp: With that, there were settlements, where basically what they did have was split up among the people who made claims. And there was some coverage for it, as well, from the SIPC and other organizations.
It's also important to know that in the case of brokerage insolvency -- some cases fraud -- it does not insure you against investments going down or does not insure you against a financial advisor giving you bad advice. You're on your own for that.