How New FDIC Rules Can Affect Your Savings
U.S. banks are gearing up for an expected flood of panicky phone calls and questions later this year, when they start advising all of their customers that deposit insurance rules are changing.
The Federal Deposit Insurance Corp. announced this week that as of Dec. 19, those who have self-directed retirement accounts in banks are entitled to less government deposit insurance coverage.
Here’s a question-and-answer look at the changes:
Q: What is the FDIC doing and why?
A: The FDIC is putting into effect rules passed by Congress two years ago in a banking reform bill. That bill called for two significant changes to deposit insurance--one restricting deposit insurance coverage for certain pension plans and the other restricting it for individual retirement accounts.
The pension plan changes went into effect last December. The changes to individual accounts will go into affect this coming Dec. 19--the anniversary of the bill’s passage.
Q: What changed with pension plans?
A: So-called “pass-through” insurance coverage has been pulled from plans that place their assets in troubled banks and thrifts. Pass-through coverage means that each beneficiary in the plan gets up to $100,000 in coverage versus ordinary coverage, which gives coverage of only $100,000 per depositor.
Pass-through coverage is key to pension administrators because these plans frequently deposit millions of dollars in any given institution for the benefit of hundreds of workers. In the past, for example, a plan that deposited $10 million in a bank for the equal benefit of 100 workers could be fully insured. If the bank failed, workers would get $100,000 from the FDIC.
Under the new rules, if the plan put the $10 million in a troubled bank, it would only get per-depositor coverage. So, if the bank failed, the FDIC would pay just $100,000 to the plan, which would divide that among all 100 workers--$1,000 each.
Q: Why would a pension manager deposit money in a sick institution?
A: There are two possible reasons--ignorance and rates. Sick financial institutions tend to pay the best rates. However, getting information on them can be a bit tricky, since the FDIC won’t tell you about an institution’s health.
However, there are numerous reputable bank and thrift rating services. Pension managers who aren’t able to determine an institution’s health on their own are likely to subscribe to one of the rating services to ensure they won’t run afoul of the rules, experts say.
Q: How do the changes to individual accounts work?
A: Under current rules, you can deposit up to $100,000 in an Individual Retirement Account (IRA), $100,000 in a SEP-IRA, another $100,000 in a Keogh plan and, if applicable, up to $100,000 in a so-called 457 plan and get full FDIC coverage for all $400,000.
The new rules will limit you to $100,000 in coverage for all those accounts combined. However, another type of account, such as a checking account or a CD, will continue to get separate FDIC coverage, says Andrew Porterfield, an FDIC spokesman.
That means you can have a $10,000 certificate of deposit and a $100,000 IRA account and be insured for the full $110,000.
Q: I now have more than $100,000 in separate retirement accounts at one bank. What do I do?
A: When the accounts mature, you may want to shift some of your money into another bank. However, the FDIC says you don’t have to suffer an early withdrawal penalty to keep your insurance coverage. If the bank fails before your account matures, they say they’ll look to previous rules to determine your coverage.
Q: I have more than $100,000 in retirement savings and I don’t want to run all over town depositing money. What are my options?
A: That depends on your goals. But you might be wise to pull some of your money out of CDs in favor of investments that provide better returns, such as stock and bond mutual funds. Your principal is not insured when you invest in a mutual fund. However, their historic rates of return are significantly better than those on CDs. They’re also convenient and many don’t charge annual fees on retirement accounts when you’re making a substantial investment.
