Is My Fidelity 401(k) Federally Insured?
Your Fidelity 401k account is not federally insured the same way, for example, your deposit at the local bank is. Because of the normal risks inherent in investing, insurance against loss of value is never provided. Instead, companies like Fidelity rely on both federal and private insurance to protect your assets, including 401k assets, against broker theft or business failure.
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Investment Insurance
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Member firms, including Fidelity, participate in the Securities Investor Protection Corporation (SIPC), created primarily to protect investors in case their brokerage firm goes bankrupt or out of business. If Fidelity were to fail, the SIPC would arrange for a court-ordered trustee to liquidate the firm's assets and turn control of account assets over to another firm for administration. The SIPC also gets involved when assets are missing from accounts.
Private Insurance
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Many brokerage firms, Fidelity included, purchase private insurance over and above the protection provided by the SIPC, which is limited to $500,000 for securities (a money market fund is considered a security by the SIPC) and $250,000 for uninvested cash. Fidelity reports on its web site that it has an aggregate $1 billion in "Excess of SIPC" coverage through Lloyds of London and other insurers.
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Fraud and Loss
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Although the Federal Deposit Insurance Corporation (FDIC) insures against the loss of value in bank accounts, the SIPC is not the "investment version" of the FDIC. Dollars do not fluctuate in value (foreign currencies excepted), and are considered risk-free. Not so with a stock or mutual fund investment, in which the investor hopes to out-perform cash. For this reason, the SIPC also cannot insure you against purchasing a worthless investment or an investment sold to you by fraudulent means.
Alternatives
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If your primary concern is to make sure you don't outlive your retirement assets, you can purchase an annuity upon retirement. This is an insurance product that provides the owner with guaranteed income for life, based on the value of the account and actuarial factors. Income is reduced when you add cost-of-living adjustments or provisions for a surviving spouse. Bear in mind, however, that annuities are expensive and you might get similar results more cheaply by just having your assets professionally managed.
Some 401k plans have begun to offer annuities as an investment choice, so check with your benefits representative or plan sponsor for more information.
Education
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If you are concerned about market losses in your 401k account before you retire, your best protection might be education. Check with your benefits representative or with Fidelity directly to find out how you can invest in your 401k to maximize value and minimize risk. Learning how to invest well is easier than you might think.
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