The Federal Deposit Insurance Corporation (FDIC) only covers certain types of deposit accounts at FDIC member banks and does not insure investments like mutual funds whether or not they were sold by a bank. For those reasons, most of the money in 401(k) plans is not FDIC-insured, except in rare instances. This article explains whether your 401(k) might be covered—or partially covered—by the FDIC.
Key Takeaways
- The FDIC covers certain types of bank deposits. It doesn't cover investments like mutual funds, even if the bank sold them
- Most 401(k) plans do not have FDIC coverage, with the exception of certain assets in a self-directed 401(k) plan, such as a solo 401(k).
- Bank accounts, such as CDs, held in self-directed 401(k) plans may be insured if the bank is an FDIC-insured institution.
- CDs purchased from brokerage firms may also have FDIC protection if the broker bought the CD from an eligible bank.
When the FDIC Covers 401(k) Investments
The FDIC provides insurance coverage to certain types of accounts held at FDIC member banks. Those include:
- Checking accounts
- Savings accounts
- Money market deposit accounts (MMDAs)
- Time deposits, such as certificates of deposit (CDs)
It does not cover:
- Stock or bond investments
- Mutual funds
- Crypto assets
- Annuities
- Municipal securities
- U.S. Treasury bills, bonds, or notes
In the case of the latter, uncovered group, even if those investments or financial products were sold through an FDIC member bank, the FDIC does not insure them.
The FDIC provides limited coverage to self-directed defined contribution plans, including self-directed 401(k) plans, to the extent that the assets in them are of a type that normally qualifies for FDIC coverage, as listed above.
A self-directed 401(k) plan is typically a solo 401(k) or self-employed 401(k), sometimes also referred to as an independent 401(k). These plans are typically set up to serve the owner of a one-person business or that person plus their spouse.
Larger employers may also offer a self-directed 401(k) option to their employees, through a separate self-directed account or "brokerage window" that allows them to put all or part of their 401(k) into investments that their employer doesn't make available as part of its regular plan.
In those cases employees may have the option of choosing FDIC-insured bank products, such as CDs or a money market account, for a portion of their 401(k), allowing that much of their 401(k) to obtain FDIC coverage. Suppose, for example, someone has a 401(k) account worth $100,000 in total. If it's 50% invested in stock funds, 25% in bond funds, and 25% in a money market account at an FDIC-insured bank, the $25,000 in the money market account is covered by the FDIC, but the rest isn't.
CDs sold through brokerage firms, commonly called brokered CDs, may also have FDIC coverage if the broker purchased the underlying CD from an FDIC-insured bank. (Brokers typically purchase large CDs from banks, then break them up into smaller CDs for sale to individual customers.)
The failures of California-based Silicon Valley Bank and New York-based Signature Bank in March 2023 illustrated how quickly the FDIC can move in when a bank goes under. Customers at both banks were immediately assured by the FDIC that their deposits were safe and intact (including any 401(k) assets that were eligible for FDIC coverage).
Other Types of Retirement Plans and FDIC Coverage
The FDIC doesn't insure retirement plans as such. But, as mentioned above, certain types of deposits held within a plan may be eligible for coverage.
Not every type of retirement plan account qualifies, however. The list is limited to what the FDIC calls "certain retirement accounts." Those are:
- Individual Retirement Account (IRA)s, including traditional, Roth, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plans for Employees (SIMPLE) IRAs.
- Self-directed defined contribution plan accounts, including self-directed 401(k) plans, SIMPLE IRAs held in the form of a 401(k) plan, self-directed defined contribution profit-sharing plans, self-directed Keogh plan accounts (or H.R. 10 plan accounts) designed for self-employed individuals, and Section 457 deferred compensation plan accounts, such as an eligible deferred compensation plan provided by state and local governments, regardless of whether the plan is self-directed.
Types of retirement plans that don't qualify under this definition include defined benefit plans and 403(b) plans. Many defined benefit plans are, however, insured up to certain some limits by the federal Pension Benefit Guaranty Corporation (PBGC).
What Is a Self-Directed Retirement Account?
The FDIC defines self-directed to mean that "plan participants have the right to direct how the money is invested, including the ability to direct that deposits be placed at an FDIC-insured bank." The FDIC adds that, "If a plan has deposit accounts at a particular insured bank as its default investment option, then the FDIC would deem the plan to be self-directed for insurance coverage purposes because, by inaction, the participant has directed the placement of such deposits." Also qualifying under the FDIC's definition are defined contribution plans that cover only a single employer/employee, established by the employer "with a single investment option of deposit accounts at a particular insured bank."
Are 401(k) Plans Protected in Other Ways?
Retirement accounts, such as 401(k) plans, are generally protected from creditors and related lawsuits, making them safe from garnishment or seizure by creditors. However, spouses and the Internal Revenue Service (IRS) may be able to make claims on an individual's 401(k) assets.
Is My 401(k) Safe if My Employer Goes Bankrupt?
While 401(k) plans aren't covered by the federal Pension Benefit Guaranty Corporation, which insures many traditional defined benefit pension plans up to certain limits, they are considered relatively safe. The U.S. Department of Labor, which oversees 401(k) plans under the Employee Retirement Income Security Act (ERISA), says that, "Generally, your retirement assets should not be at risk when a business declares bankruptcy, because ERISA requires that promised benefits be adequately funded and that retirement funds be kept separate from an employer’s business assets and held in trust or invested in an insurance contract."
The Bottom Line
Most of the assets in 401(k) plans are not eligible for FDIC insurance protection. However, there are other safeguards in place that make 401(k)s relatively safe.
