What if the brokerage firm that handles my IRA fails?

BY busadmin  September 19, 2008 at 1:12 PM EDT

Question/Comment: Everyone seems to be concerned about the financial institutions failing. I have three questions:

If institutions such as Fanny Mae, Freddie Mac, AIG fail and others fail or taken over by the government, how am I affected?

What if the brokerage firm that handles my IRA fails? I’m already retired. What happens to my money?

Last, is my pension at risk if the above companies fail?

Paul Solman: Supposedly, your IRA is protected by insurance from the SIPC – the Security Investors Protection Corporation, which says it “maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms.” From the SIPC Web site back in March:

“When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers’ cash, stock and other securities. Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever or wait for years while their assets are tied up in court.”

SIPC either acts as trustee or works with an independent court-appointed trustee in a brokerage insolvency case to recover funds. The statute that created SIPC provides that customers of a failed brokerage firm receive all non-negotiable securities – such as stocks or bonds — that are already registered in their names or in the process of being registered. At the same time, funds from the SIPC reserve are available to satisfy the remaining claims of each customer up to a maximum of $500,000. This figure includes a maximum of $100,000 on claims for cash.”

As to your pension, if it’s of the defined-benefit variety (you get a fixed payment at regular intervals), it’s insured up to $51,750 a year by the PBGC: the government’s Pension Benefit Guaranty Corporation. But check out their Web site for nuances.

As to your first question, you’re affected as we all are: it’ll be your taxes and/or more borrowing and/or a weaker dollar that will pay for all this.