With any broker, insurance is essential.
Since both customers and brokers deal with money, there needs to be some protection to ensure that whatever the situation, the customer interests will be prioritized.
If you have a Fidelity account or you’re thinking of opening one, you might wonder whether Fidelity provides FDIC insurance.
Is Fidelity FDIC Insured?:
Yes, Fidelity accounts are FDIC insured, but not all of them. The only FDIC insured accounts at Fidelity are those which utilize the FDIC Insured Deposit Program. These include the Fidelity Cash Management Accounts, certain Fidelity retirement accounts, and the Fidelity Health Savings accounts.
What Other Types of Protection are Available at Fidelity?
Like I pointed out, Fidelity’s FDIC protection does not protect all Fidelity accounts. Considering that, is there any other sort of protection available to cover all Fidelity accounts?
Yes. Anyone familiar with how insurance policies work will also know that most times, just one insurance policy might not be enough to fully protect you.
So, what are the other types of protection available?
The SIPC Protection
The SIPC stands for the Securities Investor Protection Corporation. It is a nonprofit organization responsible for protecting the securities of any brokerage firm which is its member.
Since Fidelity is a member of the SIPC, all of the securities in Fidelity accounts are covered by the SIPC.
Generally, the SIPC will cover up to $500,000 in securities per account which includes a $250,000 limit for cash held in the brokerage account.
Even money in money market funds, which are fixed-income invested in debt securities with short maturity periods, are protected. That’s because money market funds are technically securities.
The SIPC protection will only be used to pay customers when and if the brokerage goes bankrupt. The SIPC protection will not cover investment losses or fraud claims if the brokerage is still operational.
Finally, the SIPC protection will not cover assets like commodity futures contracts, precious metals, fixed annuity contracts not registered with the SEC, and investment contracts like limited partnerships.
Excess of SIPC Protection
Through the NFS, Fidelity provides extra protection to act in excess of the SIPC’s protection. Obviously, the SIPC protection has its limits, covering only $500,000 in securities per account.
So, what if you had more than $500,000 worth of securities in your Fidelity account? This is where the excess SIPC protection comes in.
This excess protection comes from Lloyd’s of London, Axis Specialty Europe Ltd., and Munich Reinsurance Co. Just like with SIPC protection, the excess protection will only cover when the firm goes bankrupt, and then after the SIPC protection is exhausted.
With the excess of SIPC protection, there is no per-account limit to cover securities. However, cash awaiting investment will only be covered up to $1.9 million.
But you need to keep in mind that with Fidelity’s excess of SIPC protection, the total aggregate available is $1 billion.
Mutual Funds Protection
While this is not an insurance protection cover, it still functions to protect the investment of Fidelity customers in Mutual Funds.
This protection means that for anyone who owns Fidelity mutual funds directly, and not through a brokerage account, Fidelity cannot access money in the fund to satisfy financial obligations.
This is because the mutual fund and Fidelity are separate legal entities. When you invest in a mutual fund directly, your investment goes into the assets owned by the mutual fund.
However, this also means that the SIPC and excess of SIPC protection will not cover this account. Because it covers only brokerage accounts, not directly held mutual fund accounts.
Workplace Retirement Accounts Protection
The Fidelity workplace retirement plans like 401(k)s and 403(b)s are protected from creditors if Fidelity runs into financial problems.
Again, this is not insurance protection. It is more like a guarantee that with these accounts, your money will remain secure.
How does the FDIC Insurance Work?
The FDIC, unlike the SIPC, does not cover brokerage accounts. It protects cash deposits at FDIC member banks. So how does FDIC insurance cover Fidelity accounts?
Fidelity’s FDIC Insured Deposit Sweep Program. This program sweeps your uninvested cash balance into a program bank which makes it eligible for FDIC insurance.
As I pointed out in the introduction, not all Fidelity accounts make use of the program. But for those that do, they have the cash deposits insured for up to $250,000.
Among the eligible Fidelity retirement accounts for this program are Traditional Rollover and SEP IRAs, Fidelity Roth IRAs, Fidelity Simple IRAs.
If you have more than $245,000 as your uninvested cash balance, your eligibility is maximized by allocating your uninvested cash across multiple banks.
This makes you eligible for more FDIC insurance, and since at a minimum, there are up to five banks available to accept customer deposits, customers could be eligible for up to $1,250,000 of FDIC insurance.
Basically, what this means is that once you have more than $245,000 as your uninvested cash balance, the extra cash is moved into a different bank account with a different bank.
This can be done with up to multiple program banks, with a maximum of $245,000 in each account to ensure any interest is also FDIC insured (making you eligible for a $250,000 FDIC insurance on each account).
Any brokered Certificates of Deposit purchased at Fidelity is also covered with FDIC insurance.
When will the FDIC Insurance cover you?
The FDIC insurance will cover you should the program bank with your deposit fail. Historically, the FDIC has a very good track record when it comes to paying out insurances, so you need not worry.
When your uninvested cash balance is swept into a program bank account, you will, of course, have access to that account in the program account.
Should the program bank then fail, the FDIC provides insurance by providing you with another account in a different insured bank with the same balance, or they issue you a check for your insured balance.
Bottom Line: Is Fidelity FDIC Insured?
Although Fidelity accounts are FDIC insured, not all of them are. Moreover, the FDIC insurance is not a direct one.
However, you still need not worry because there are other protection methods available, particularly the SIPC insurance which directly covers brokerage accounts.
