Stephanie McCullough (00:06):

This is Take Back Retirement, the show that’s redefining retirement for women. Retirement is an old-fashioned cultural concept. We want to reclaim the word so you can make it your own. I’m Stephanie McCullough, financial planner and founder of Sofia Financial, where our mission is to reduce women’s money stress and empower them to make wise holistic decisions so they can get back to living their best lives. Kevin Gaines is my longtime colleague with deep expertise in the technical stuff: investments, taxes, retirement plan rules. He’s a little bit nerdy and quantitative, I’m a little bit touchy-feely and qualitative. Together, through conversations and interviews, we aim to give you the information and motivation you need to move forward with confidence. We’re so glad you’re here.

Kevin Gaines (00:54):

Every Christmas, we sit and watch It’s a Wonderful Life. Well, at least I do. And there’s always that one scene, Jimmy Stewart, Donna Reed going off on their honeymoon, and all of a sudden, Bailey Building and Loan is swarmed by depositors looking for their money. It’s the start of the Great Depression, and banks everywhere are failing. Donna Reed has to give up her honeymoon, saves the day, but she gives up her honeymoon by just handing out the cash to the depositors. Fortunately for Donna, it doesn’t happen that way anymore. Well, okay, it’s too late for Donna, but it doesn’t happen to her grandchildren. On today’s episode of Take Back Retirement, we talk about the wonderful world of money insurance.

Stephanie McCullough (01:45):

Coming to you semi-live from the beautiful Westlakes Office Park in suburban Philadelphia, this is Stephanie McCullough and Kevin Gaines of Sofia Financial, an American Financial Management Group. Say hello, Kevin.

Kevin Gaines (01:55):

Hello, Kevin.

Stephanie McCullough (01:57):

In our world of financial services, there are very few guarantees. In fact, when we are little baby financial advisors, one of the first things we learn is that we can rarely ever even say the word guarantee. Usually, you’ve got some risk that’s dependent on the health of the company that you’re working with. However, there are some backstops. Today we’re going to talk about the government insurance programs that help protect you from the failure, the potential failure, of these financial services companies. And I do want to note this is going to be a super-high-level overview. We’re not going to go into the details and nitty-gritty. And if Kevin has the inclination to go into the details, I’m going to kick him under the table, not literally, because we’re recording in separate places. But I promise we’re not going to get too geeky on here, we’re just trying to help untangle some of these acronyms that you may have heard of.

Kevin Gaines (02:50):

And just remember, she promised that we’re not going to get geeky, and my job this episode is to test those limits, but we’ll see.

Stephanie McCullough (03:00):

So I want to tell a quick story. My first job after graduate school was working for the federal government. There was a program called the Trade Information Center, and they had eight fresh-faced young graduates of master’s programs whose job it was to help Americans navigate the alphabet soup of government programs that were set up to help US companies export. So believe it or not, this was a small slice of the federal government. And in those first few weeks, we learned the definitions of so many government acronyms. Like many professions, the federal government is awash in acronyms. So for example, I worked in the TIC at the ITA in the DOC, and, I mean, it went on and on.

Kevin Gaines (03:54):

All right, so those acronyms, for the record, we will not be talking about today. However, we will throw out PBGC, FDIC, SIPC, as well as DOT. For the record, Department of Treasury. Anyway, I think the first one we should start with, Stephanie, is FDIC, because that’s the one that everybody’s going to see more often, and as we record here in the spring of 2023, it’s actually even in the news at the moment. So we’ll start with FDIC. Besides, that’s what would save Donna Reed today.

(04:37):

So as I made the reference in the opening, this was the start of Great Depression, 1929, we get all the bank failures happening. In 1933, Congress created the Federal Depository Insurance Corporation, which was designed to guarantee the deposits of most people using the banks. Even back then, they had limits on the dollars. I think it was $2,500 back then. It’s now $250,000. But it was designed to protect, basically, mom-and-pop small businesses.

Stephanie McCullough (05:18):

I think it’s helpful to maybe back up a little bit and just review how banks work, again, on a super-high level. So if I go and deposit $100,000 at the bank, whatever bank that I choose, the bank doesn’t keep those $100,000 just sitting there waiting for me to come calling. The function of banks in our financial system is to be, in effect, a multiplier, so when I make a deposit, the actual reason the bank is able to pay me interest is that the bank goes and turns around and uses part of that money to make a loan to someone to buy a house, to invest in a business. Whatever it might be, the goal is to promote some additional economic activity and therefore help the economy go, right? This is how banks work. It’s not like Gringotts Wizard Bank, where everything that you put in there is held in a super-safe vault just for you and stays there until you come with your magic password to get it out.

Kevin Gaines (06:26):

Besides, most banks aren’t allowed to have dragons.

Stephanie McCullough (06:30):

So the issue is that if everyone… Let’s just use a simple example. If there’s a thousand people who each put $100,000 at the bank and they all come calling on the same day saying, “Hey, I want to take all my money out,” the bank’s up a creek, which is what happened with Silicon Valley Bank last week when $42 billion went out the door in one single day. Doesn’t happen so often, but that’s why we have the backstop and the guarantee of the Federal Deposit Insurance Corporation. So the FDIC is an insurance program and it’s actually paid into by the banks. All banks are required to pay some level of premium into this fund, which is used as the guarantor of last resort, right, Kevin?

Kevin Gaines (07:17):

Yes, I mean, FDIC literally is insurance. Like you said, Stephanie, banks are paying premiums. And by banks, we mean most financial institutions. Credit unions actually have their own, NCUA, yet another alphabet soup for us, but it works the same way. But the important thing is is there is an insurance program paid by the banks to help protect depositors if and when banks fail. It’s not necessarily meaning that the federal government is coming in to bail us out where there’s a set-aside…

Stephanie McCullough (07:54):

With your tax dollars. Right.

Kevin Gaines (07:55):

… to protect. There’s this pool of money that swoops in as needed.

Stephanie McCullough (08:00):

So what happens is if your bank goes under one day, you wake up to the sad headlines or news on social media that your bank has been taken over by the FDIC. What that means is some things are covered by this insurance, but of course, as Kevin mentioned, there are limits. Not everything that you might have done at the bank is covered. So, Kevin, what are the different types of things someone might do at a bank?

Kevin Gaines (08:28):

Most things with the banks are going to, you got FDIC, you deposit, you open your savings accounts, you buy your CDs. But starting back in the 1990s, and I was doing this, so I know how this worked, you actually had investment employees there to help you with mutual funds, annuities, stocks, anything along those lines. Those are not covered under FDIC insurance. I mean, I still remember back in the day, and I think the rules have changed a little bit, you couldn’t even have the posters that always you see in the banks advertising this loan or this account, you couldn’t have any posters talking about investments behind the teller line, because there was concern that if they saw the ad behind a teller, people might think, “Oh, this stuff is covered by FDIC insurance,” and it’s not. Safe deposit boxes, they’re not covered.

Stephanie McCullough (09:32):

That’s more like Gringotts, right? It sits there where you put it with your key.

Kevin Gaines (09:37):

Yes, exactly. Correct.

Stephanie McCullough (09:39):

But not covered. Grandpa’s coin collection is not covered by FDIC insurance.

Kevin Gaines (09:45):

Exactly. I mean, those are the big things that aren’t going to be covered. I mean, there’s some other details, but for most of us, we’re good with this.

Stephanie McCullough (09:53):

So we mentioned there are limits, there are dollar number limits on the insurance. So I think it’s important to have an understanding of what these limits are because this also played a part in the recent headlines. So big picture is that the limit is $250,000, but, of course, there are more details than that. Now that limit has gone up, as Kevin mentioned the very beginning, it might have been $2,500, now it’s 250,000. That went up with the Dodd-Frank Act in, what, 2010 after the great financial crisis.

Kevin Gaines (10:28):

Or if you want to sound like an insider, the GFC.

Stephanie McCullough (10:33):

More acronyms. However, so even though the headline limit is 250,000, you might actually have more protection than that. And that comes up with a term in the FDIC world called ownership category. Kevin, what does this mean?

Kevin Gaines (10:51):

So yes, you got to love the federal government because they come up with all sorts of weird names. Ownership category, what the hell is that? Well, what they’ve done is they’ve said, “Listen, it’s real easy to have more than $250,000 in a bank.” And they felt the need to protect people with more money than that, so they came up with these ownership categories. And we’re going to have a list on our show notes linked to the FDIC page that will actually go through each of these and describe what’s covered. The big thing is there’s rules for governing joint accounts, for example. So each owner of a joint account is entitled to $250,000,-

Stephanie McCullough (11:45):

On that account.

Kevin Gaines (11:46):

… meaning if you have with your spouse $500,000 in a joint account, the full account is covered because there’s two owners. 500,000 divided by two is $250,000. Each of you have $250,000 in protection. The account is fully protected. And just to clarify, the FDIC considers each owner an equal owner of that account for purposes of this calculation. So even though you may be on your mom’s account to help her out, all of a sudden it’s now a joint account, and instead of your mom having $250,000 in protection, you have a total of $500,000 protection in that account.

Stephanie McCullough (12:40):

So when I think about my bank accounts, I have an account in my own name, that’s one ownership category, single ownership. I have a joint account with my spouse. So that’s another ownership category, which Kevin just explained, would have a total of $500,000 of protection, half from me, half from my spouse. I could have an IRA individual retirement account at the bank in, let’s say, CDs, not invested in mutual funds but in CDs. That account has $250,000 of protection. I have a business account which has $250,000 of protection. There might be a trust account, of which I am trustee, has $250,000 of protection. Kevin, did I miss any of the big ones?

Kevin Gaines (13:29):

No, that’s it. Government accounts are a different category, but not too many of us have one of those.

Stephanie McCullough (13:37):

So FDIC protection. So if I have an individual account with $400,000, the FDIC is ensuring if my bank goes bankrupt, $250,000 of that. But it doesn’t necessarily mean the day after the bank goes under, I can get my money, right, Kevin? There’s sometimes a little bit of a delay.

Kevin Gaines (13:57):

There can be. The FDIC’s not obligated to make it available one hour after they seize the bank, but typically they do. I mean, as you see these stories, the ones more recently, but even if you think back to 2008, when Washington Mutual, WaMu, failed, for example. They swept in and they get that stuff opened or reopened fairly quick. So typically, you don’t have to worry about a delay in getting to your money, but please be aware it is a possibility.

Stephanie McCullough (14:30):

So, Kevin, in my example where I have $400,000 in an individual account, what if I’m worried about protection? What’s something that I could do to have more protection on my money?

Kevin Gaines (14:46):

Well, as far as protecting against bank failure, put more people on your account. Break up your accounts. So instead of having 400,000 in just your name, take 150,000 of it and add somebody’s name, add your spouse, add, if you’re an adult child or a parent, stranger on the street, it doesn’t matter as far as the FDIC’s concerned, they don’t give a damn. You may, but they don’t. But then that does allow you to expand the dollars that are protected.

(15:26):

The other thing you can do, this is even easier, move it to a different bank, some of it, because that 250 is for each institution, each bank. So you can have 250,000 sitting in Bank of America, then you put another 250 in PNC, and another 250 in JP Morgan, and at some point people’s going to ask, “Why do you have all this cash laying around.” Different episode, different conversation. But yes, moving it to different institutions will also allow you to expand your protection coverage. Plus, it diversifies you from bank risk because the odds of all of these banks going belly up at the same time, pretty damn low.

Stephanie McCullough (16:12):

Please see episode 29: How Much Cash Should I Have and Where Should I Be Putting It? So next time you walk into your bank lobby, if any of you actually go to banks anymore in person, you’ll see the FDIC plaque on the wall, and now you know a little bit more about what that stands for.

Kevin Gaines (16:30):

But speaking of plaques, if you go into your bank, on one desk or maybe a couple desks, you’ll see a different plaque, and this one says SIPC, SIPC. You also see the same letters if you walk into your local Schwab branch or Fidelity branch or stockbroker.

Stephanie McCullough (16:53):

So remember we mentioned that guy in the lobby of the bank or gal in the lobby of the bank who was trying to sell you some investments. So if you bought some mutual funds from that nice person in the lobby of your bank, as we said, not covered by the FDIC, but it is covered by SIPC. So, Kevin, what does SIPC stand for?

Kevin Gaines (17:14):

Securities and Investment… You remember.

Stephanie McCullough (17:18):

Securities Investor Protection Corporation.

Kevin Gaines (17:21):

There we go.

Stephanie McCullough (17:22):

And this is talking about investment accounts, brokerage accounts, and such. So in the old days, we even have a client who’s got one of these framed on his wall. So in the old days, when you bought a stock, you got a certificate that they sent it to you in the mail, and they were lovely and had interesting artwork on them, but that’s how you prove you own it. You actually had the piece of paper. And if you bought a bond in the old days, Kevin, what happened then?

Kevin Gaines (17:49):

I could tell you exactly what happened because this was one of my first jobs in the bank was you would have the bond certificate, and attached to it were what were called coupons. I mean, if you ever hear the phrase coupon clipper, this is actually where the phrase came from, not the Sunday newspaper for the grocery store. It was actually to clip the coupon to receive the interest payment from that particular bond for that particular month. You’d have to take it to the bank, and they would turn around, they would give you the cash, the interest you were entitled to, and then they would then have to take those bond coupons and submit them for reimbursement from the actual corporations or government or whoever issued the bond. And yes, one of my first jobs in the bank was sitting, aggregating all of those coupons, getting them together for our shipment out to, for our bank to get reimbursed on.

Stephanie McCullough (18:50):

So it was pretty laborious. It was very paper-heavy and labor-intensive. For a long time now, at least since I’ve been in the industry, 25 years, the majority of investments are held at a custodian. So a custodian is another function in the financial system. Kevin, how would you explain the role of a custodian, because I don’t want to explain it?

Kevin Gaines (19:15):

They’re holding the money. It’s really that simple. They sit there, they hold the securities for you, they hold your cash for you, and their job is to make it available to you whenever you need it and to make sure the transactions get processed as you do a buy or a sell or receive interest or a dividend, whatever it is. They’re in charge and responsible for making sure all of those records are processed the way they’re supposed to be. Problem is they’re a business. And as we know, businesses can go bankrupt. So that’s what SIPC is for, is to protect you, the investor, in case, fill in the blank of the investment firm, goes belly up and your money is trapped.

Stephanie McCullough (20:10):

So to make it a little bit more clear, for example, if a client of ours comes to us and opens an account with us, we use Fidelity as a custodian. I understand it gets confusing because Fidelity, for example, like a lot of these companies, they do lots of different roles in the financial world. So we’re not necessarily buying Fidelity mutual funds. We’re the ones providing the financial planning advice, not somebody at Fidelity. But another role of Fidelity is to be the custodian. So when a client makes a deposit into an account with us, they write the check to Fidelity, not just Stephanie and Kevin – joint account.

Kevin Gaines (20:46):

Although, that would be fun.

Stephanie McCullough (20:47):

That would be fun, but that’s not how it works. For example, if you’ve got a brokerage account at a Schwab and in that account you own some mutual funds from BlackRock, some mutual funds from American funds, and then you own a few stocks, say some Apple, some GE, I don’t know, a whole bunch of different stuff. You don’t actually own anything produced by Schwab, but Schwab is the custodian, right? They’re the ones holding it. So in this example, Kevin, not that we’re saying anybody’s going bankrupt, but what would the SIPC protect us from and what would it not?

Kevin Gaines (21:22):

So what it does protect you from is, Schwab locks their doors, in this example, and only an example, and you can’t get to your dollars. SIPC steps in just like the FDIC does at the bank. SIPC walks in the doors, takes over the record-keeping and everything, and says, “Okay, Stephanie, you had $400,000 in your account, $100,000 in cash, and 300,000 worth of securities.” SIPC will make sure you get your 100,000 in cash and $300,000 worth of stocks, bonds, mutual funds back, so you can then do whatever you’re going to do with it.

Stephanie McCullough (22:08):

So just to note quickly, you can hold cash in a brokerage account, and that cash, even though it’s not technically invested, it’s not covered by FDIC, it’s covered by SIPC, right? So it depends on where it is. Sorry, continue.

Kevin Gaines (22:21):

Right. And so as a result, SIPC actually has higher limits than FDIC. FDIC, as we said, is 250 at this moment. They can always change these things through legislation. It’s not like the tax code, where stuff gets indexed for inflation, just periodically, Congress says, “Let’s raise the limits.” So FDIC is 250. SIPC is 500,000 with the caveat, 250,000 of cash is protected, meaning you have $500,000 in your brokerage account, great, but 300,000 of it is cash. Only 250,000 of those dollars are going to be protected. The other 50,000, maybe you get it back, maybe you don’t. It depends on what they can recover through the bankruptcy.

Stephanie McCullough (23:15):

So markets go up, markets go down, right? We’ve talked before about the difference between saving, which is FDIC world, and investing, which is buying stocks, bonds, mutual funds, that kind of thing, you’re at risk. They go up in value, they go down in value. We’ve talked before about the whole reason they might go up more over the long term is because you’ve got to ride through the down markets. So hear us very clearly, SIPC does not protect you from market downturns or from any one particular company going out of business and you losing all of your investment in that company. That’s still a possibility. It’s protecting from the custodian going bankrupt, shutting its doors, getting swallowed by a black hole, who knows? That’s the type of protection we’re talking about.

Kevin Gaines (24:02):

Right. It’s going to protect you from the business manager’s idiocy. It doesn’t protect me from my idiocy.

Stephanie McCullough (24:11):

So remember, in FDIC world, we talked about ownership categories. Of course, the federal government being the federal government, and having worked at the federal government, I can say this with certainty, they’re not going to use the same words, but in SIPC land, there’s something called separate capacity. So, Kevin, if I have an individual account and an IRA account and a joint account, how does that work in SIPC world?

Kevin Gaines (24:37):

So as you said, it’s the same concept that FDIC has. They have slightly different categories, and what the hell, we’ll put that link on the show notes as well because we can. So they’re going to treat individual accounts separate from joints, separate from corporate accounts, separate from IRAs. Interestingly, they also have, in SIPC, a separate category for Roths…

Stephanie McCullough (25:05):

Roth IRAs.

Kevin Gaines (25:05):

… as opposed to IRAs. With FDIC, they actually just list all retirement accounts as one. So that’s one distinction. Also, executor accounts, if you’re covering for a dead relative, it’s a separate protection, you’re not going to create any overlap, as well as guardianships and trusts. So again, please, we’ll have a link on the show notes so you can see what each category is and how they define each category.

Stephanie McCullough (25:36):

So if you don’t remember all the details of this, do not fret. Just remember that there are various insurances, various government backstop programs for different types of financial products. Kevin, there’s a couple others we were going to mention briefly.

Kevin Gaines (25:52):

There’s a few others out there. Probably one, if you’re receiving a pension or you’re supposed to receive a pension, you’re going to want to know PBGC, Pension Benefit Guarantee Corp., which will sit there if the company goes belly up. They come in, they take over the pension, and they continue to make your payments. Problem with PBGC is there’s no guarantee you’re going to get 100% of your benefit. Frankly, a lot of times there’s going to be haircuts involved, so if you were getting $100 a month, maybe it gets reduced to 90, 80, or even $70 a month, which isn’t great but beats the heck out of zero. And then, Stephanie, as my favorite insurance agent, no offense to my other insurance agents, but Stephanie is definitely my favorite. So yeah, so I’m intending offense to all the other insurance agents I know. Anyway, there’s also programs for insurance, correct?

Stephanie McCullough (27:00):

Yeah, insurance is handled differently. So if you own an insurance product, which is life insurance and annuities, there’s no federal program, but most states have insurance programs that provide some level of protection. So if an insurance company goes belly up, it’s often the state that’s going to step in with their guarantee funds to do their best to make people at least partway whole. And the stories I’ve heard, that can take a lot longer to get your money out than, for example, FDIC.

Kevin Gaines (27:32):

But similar to FDIC and SIPC, the insurance companies are paying-

Stephanie McCullough (27:37):

Into the state program.

Kevin Gaines (27:38):

… premiums into the program, so you’re not necessarily relying on the solvency of your state, which some states you may not always be all that excited about.

Stephanie McCullough (27:51):

So really, we thought this was a timely topic to cover because these acronyms are being thrown around, well, the FDIC one, being thrown around in the news; SIPC, not so much. But we want you to know what the protections are against things that might cause you worry. So again, you don’t have to remember all the details. Know that these things are out here, and like Kevin said, we’re going to have some links in the show notes that you can refer back to, or you just remember what questions to ask. Hold on, what type of account is this? What type of backstop is there? Is there some government insurance involved, if things get really bad?

Kevin Gaines (28:27):

If you have more questions about, especially your bank accounts, talk to your banker. I can tell you from experience, the first thing you learn in training is how FDIC works, which accounts are covered, and how they’re separated. They know the stuff. Never hurts to ask a question. Trust me, they’ve got them before, and they will get them again.

Stephanie McCullough (28:49):

Exactly. If that’s one message we want you to take away from this, please have the guts to ask the questions. Thanks so much for being with us, and we’ll talk to you next time. It’s goodbye from me.

Kevin Gaines (29:03):

And it’s goodbye from her.

Stephanie McCullough (29:07):

Be sure to subscribe to the show, and please share it with your friends. Show notes and more information available at takebackretirement.com. Huge thanks for the original music by the one and only Raymond Loewy through New Math in New York. See you next time.

Disclaimer (29:21):

Investment advice offered through Private Advisor Group, LLC, a registered investment advisor. Private Advisor Group, American Financial Management Group, and Sofia Financial are separate entities. The opinions voiced in this material, are for general information only and are not intended to provide specific advice, or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor, prior to investing. This information is not intended to be substitute for individualized tax advice. Please consult your tax advisor regarding your specific situation.