401(k) Crisis: Is Your Retirement Money Protected From a Bank Collapse?

Could your retirement funds be impacted by a bank failure? Industry experts say there is no reason to panic, but it should warrant your attention for many reasons.

Several banks have failed recently, but remedies were quickly implemented by regulators and the Biden administration to ease investors’ concerns. However, the ripple effects are continuing to distress the economy and many questions remain. One of which is whether retirement savings like 401(k)s are protected from a collapse. Let’s take a closer look. 

History of Bank Failures

U.S. bank failures are nothing new. According to the FDIC, there were 563 bank failures from 2001 through 2023.

Some significant periods of bank failures in the U.S. include:

  1. Great Depression (1929-1933): The most severe period of bank failures in U.S. history occurred during the Great Depression. From 1929 to 1933, about 9,000 banks failed, and the bank failure rate reached a peak of more than 4,000 in 1933 alone.
  2. Savings and Loan Crisis (1980s-1990s): The savings and loan (S&L) crisis resulted in the failure of around 1,000 savings and loan associations between the 1980s and early 1990s. This crisis was primarily caused by deregulation, risky lending practices, and economic factors.
  3. Financial Crisis (2007-2009): During the recent global financial crisis, triggered by the subprime mortgage meltdown, 25 banks failed in 2008, and the number peaked at 140 in 2009. Between 2008 and 2012, more than 400 banks failed.

While there have been other periods of bank failures in U.S. history, these three periods stand out as the most significant. It is essential to note that the creation of the Federal Deposit Insurance Corporation (FDIC) in 1933, after the Great Depression, has significantly reduced the risk to depositors by insuring their deposits at FDIC-insured banks up to certain limits.

401(K) and Retirement Savings

If you are still in the workforce and have a 401(k) plan, the contributions are typically viewed as retirement savings. When markets and institutions falter, it’s natural to grow concerned over your nest egg. 

When considering how 401(k)s are impacted in a bank collapse, it can be useful to know:

  • If 401(k)s are insured.
  • What type of protection your 401(k) funds have.
  • Bank failures in U.S. history that caused a panic.
  • What to do if you are concerned about your 401(k) funds.

Are 401(k)s FDIC-Insured?

No, 401(k) plans are not insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC is an independent federal agency that provides insurance for deposits in banks and savings associations, ensuring the safety of depositors' funds in the event that a bank fails. 

FDIC insurance covers checking accounts, savings accounts, money market deposit accounts, and certificates of deposit (CDs), but it does not cover investments like 401(k) plans, stocks, bonds, mutual funds, or other securities.

However, 401(k) plans are protected in a different way. They are governed by the Employee Retirement Income Security Act (ERISA), which sets strict standards for plan administrators and fiduciaries to act in the best interests of plan participants. 

Additionally, 401(k) assets are held in trust and are separate from the assets of the company sponsoring the plan, so they are generally protected from creditors in case the company goes bankrupt. It's important to note that while ERISA provides some protections, it does not guarantee the performance of the investments within a 401(k) plan. 

As an investor, you still bear the risks associated with the performance of the investment options you choose within your 401(k).

Are 401(k)s Protected in a Bank Collapse?

Yes, 401(k) assets are generally protected in the event of a bank collapse. This is because 401(k) plans are held in trust, separate from the assets of the company sponsoring the plan or the financial institution providing the plan's investment options.

This means that if a bank or financial institution were to collapse, the assets in your 401(k) plan would not be affected.

However, it is important to remember that the investments within your 401(k) plan are subject to market risk, and their value can fluctuate based on the performance of the underlying investments. 

NJM’s president and owner Nicolas (Nic) J. McLeod explains, “While the assets in the 401(k) are protected from bank failure, they are not protected from potential losses due to market fluctuations or the performance of the individual investments you have chosen for your plan, which is why getting professional advice is paramount”.

Keeping Your Retirement Savings Safe

Bank collapses, stock market crashes, inflation, and economic instability can all negatively affect your nest egg in some way or form. And your 401(k) is not immune to market risks or the risks associated with the specific investments you've chosen for your plan. 

However, there are steps that could help protect your investments from fluctuating markets.  

Here are some tips to help protect your 401(k) from various risks, including bank failures:

  1. Diversification: Make sure your 401(k) investments are well-diversified across different asset classes, such as stocks, bonds, and cash equivalents. Diversification can help protect your investments from market fluctuations and help reduce the impact of any one investment's poor performance.
  2. Periodic review and rebalancing: Regularly review your 401(k) investment allocations and consider rebalancing your portfolio to ensure it remains aligned with your investment goals and risk tolerance.
  3. Maintain a long-term perspective: Market fluctuations and temporary setbacks are a normal part of investing. Stay focused on your long-term financial goals and avoid making impulsive decisions based on short-term market conditions.
  4. Work with a financial advisor: If you're uncertain about how to manage your 401(k) investments or protect them from risks, consider consulting with an experienced Fiduciary financial advisor who can provide personalized guidance based on your unique financial situation and goals.

Last Thoughts

While your 401(k) assets are protected from bank failures, it's essential to manage your investments to minimize other risks, such as market fluctuations and the performance of individual investments.  And while a bank failure can be stressful, it is unlikely to impact your retirement funds if they are adequately held in separate accounts and managed by a reputable wealth preservation firm.

At NJM Wealth and Preservation Strategies, we take the time to understand your situation and craft a plan that works for you.

Founded on transparency, President and owner Nicolas (Nic) J. McLeod is a man of determination and competitive grit. He is a second-generation Wealth Preservation Specialist. Nic and his team have helped their clients save millions during the previous & current market collapse. If you’d like to find out what separates us from those cookie-cutter firms & reclaim control of your retirement portfolio today, give us a call to see what our unrestricted product offerings can do for your future.

Schedule your complimentary consultation here today and learn more about how we can assist you in safeguarding your retirement savings. Or visit us online to learn more about our services.