- First of all, what is a banking crisis?
- Let’s define our terms
- How can it affect your 401k?
- What can you do to protect your 401k during a banking crisis?
- “Will the banking crisis affect my/clients 401k account ?”
The failure of several banks and the ensuing market turmoil has put investors on edge in the past week. While regulators and the Biden administration have tried to quell the concerns of jittery American consumers, the ripple effects are continuing to rattle the economy and many questions remain.
First of all, what is a banking crisis?
A banking crisis is a serious economic event that can have significant implications for individuals and businesses alike. One of the potential consequences of a banking crisis is the effect it can have on retirement accounts such as 401k plans. In this article, we’ll take a closer look at how a banking crisis can affect your 401k and what you can do to protect your retirement savings.
Let’s define our terms
Before we dive into how a banking crisis can affect your 401k, it’s important to understand what we mean by this term. A banking crisis typically occurs when there is a widespread loss of confidence in the banking system, leading to a liquidity crisis and a lack of access to credit. This can happen for a variety of reasons, such as a sudden decline in asset values, a sharp increase in loan defaults, or a collapse in investor confidence.
When a banking crisis occurs, it can have a ripple effect throughout the economy, as individuals and businesses struggle to obtain financing, consumer spending declines, and investment activity slows down. This, in turn, can lead to a downturn in the stock market and other financial markets.
How can it affect your 401k?
Your 401k is a retirement savings account that is typically invested in a mix of stocks, bonds, and other assets. The value of your 401k account is tied to the performance of these investments, and therefore can be impacted by changes in the financial markets.
During a banking crisis, the stock market and other financial markets may experience significant declines. This can lead to a decrease in the value of your 401k account, as the underlying investments lose value.
In addition to the direct impact on your retirement savings, a banking crisis can also have broader economic implications that can affect your retirement plans. For example, if you were planning to retire soon and a banking crisis leads to a recession, you may find it harder to secure part-time work or other sources of income to supplement your retirement savings.
What can you do to protect your 401k during a banking crisis?
While there’s no fool proof way to protect your 401k from the effects of a banking crisis, there are several steps you can take to help minimize the impact:
- Diversify your investments: One of the best ways to reduce your exposure to market volatility is to diversify your investments. This means investing in a mix of different asset classes, such as stocks, bonds, and commodities, rather than putting all your eggs in one basket.
- Stay the course: During a market downturn, it’s natural to feel anxious and want to sell your investments. However, this can be a mistake, as it may lock in losses and prevent you from benefiting from any rebound in the market. Instead, it’s often best to stick with your long-term investment plan and ride out the volatility.
- Consider rebalancing your portfolio: If your investments have become too heavily weighted in one particular asset class, such as stocks, it may be a good idea to rebalance your portfolio. This means selling some of your stocks and buying more bonds or other assets to restore your desired asset allocation
- Consult with a financial advisor: A financial advisor can help you navigate the complex financial landscape during a banking crisis and provide guidance on how to protect your retirement savings.
According to a recent article by Yahoo Finance, the answer to the question “Will the banking crisis affect my/clients 401k account ?” is not that simple
First off, the Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 in deposits per depositor, but there are investments that are not protected. These include stock investments, bond investments, mutual funds, crypto assets, life insurance policies, annuities, municipal securities, safe deposit boxes or their contents, and U.S. Treasury bills, bonds or notes. Also, the FDIC only insures deposits if the institution is an FDIC-insured bank.
“Most 401(k) plans are not usually backed by insurance,” American University finance professor Valentina Bruno told Newsweek. “The Federal Deposit Insurance Corporation (FDIC) only covers deposit accounts. This means that if your 401(k) is invested in stocks, bonds, or mutual funds, you’re not covered against those investments losing value.”
However, the FDIC covers money market deposit accounts (MMDA) and time deposits such as certificates of deposit (CDs).
Retirement plans the FDIC covers include IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs, up to $250,000, according to the FDIC.
And in terms of self-directed defined contribution plan accounts, the FDIC coverage includes self-directed 401(k) plans, self-directed SIMPLE IRA held in the form of a 401(k) plans and self-directed defined contribution profit-sharing plans, according to the FDIC website.
As Newsweek explained, if a 401(k) or other eligible retirement account is worth $100,000 and is 50% invested in stocks, 25% in bonds and 25% in a money market account, solely the $25,000 in the money market account would be covered by the FDIC if the bank were to collapse.
In addition, Synchrony Bank explained that if you had CDs worth $250,000 held in two 401(k) accounts at the same FDIC-insured bank, “you would still only get coverage for a total of $250,000.” To get more coverage, “you would need to transfer the amount above the insured $250,000 to another FDIC-insured bank and make sure it’s in a deposit account or type that the FDIC covers.”
Finally, experts recommended checking the custodian of your 401(k).
“Many will be at a brokerage which is covered by SPIC [The Securities Investor Protection Corporation], but it may be possible that your account is at a bank and covered under FDIC instead. Both plans cover up to $250,000 in cash but SPIC will also cover securities held in the account to a $500,000 limit,” said Jay Zigmont, Ph.D., CFP, and founder of Childfree Wealth.
In conclusion, while a banking crisis can potentially affect your 401k, there are steps you can take to help minimize the impact. By diversifying your investments, staying the course, rebalancing your portfolio, and consulting with a financial advisor, you can help protect your retirement savings and ensure that you’re prepared for whatever the future may hold.
We at Rixtrema have numerous tools at our disposal like PCT which is used to reverse stress test portfolios against extreme scenarios and shows you how your line up will be affected in case those scenarios were to present themselves or the 401k Fiduciary Optimizer that gives you low fee alternatives for your current plan menu as well as helping you to diversify your client’s menu.
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