Protecting your money in uncertain times: The role of FDIC coverage

Mark Twain said it best: “I am more concerned about the return of my money than the return on my money.”

Not since the financial crisis of 2007-2008 have many investors given a second thought about cash balances held at their bank. That all changed over the course of five days in March 2023, when three small-to-midsize banks failed, leaving some depositors scrambling to access funds in excess of Federal Deposit Insurance Corp. (FDIC) insured limits. This crisis caused many to revisit just how FDIC coverage works and how they might better protect themselves with cash deposits in excess of the limits. Shortly thereafter, the U.S. government issued a joint statement by the Department of the Treasury, the Federal Reserve and the FDIC stating that all depositors, regardless of amount, would be made whole.

Where We Are Today

While some may infer that there is an implicit understanding that the U.S. government may be backing deposits in excess of the FDIC limit, these limits have remained the same. Congress — not the FDIC, Federal Reserve or Treasury — has the authority to make this change. An important takeaway for depositors is that it may not be prudent to rely on future government intervention for amounts above the FDIC insurance limits. Instead, they may want to consider making moves to adequately protect their cash.

What Should Savers Do?

All investors should understand that investing comes with risk; however, risk should generally not play a part in cash holdings, which is why it’s prudent to have either full FDIC coverage or U.S. government backing of cash.

Read on to learn about a few ways to be fully FDIC insured or have additional government backing.

How FDIC Coverage Works

The FDIC is an independent agency created by Congress to maintain stability and public confidence in the nation’s financial system. Deposit insurance is one of the significant benefits of having an account at an FDIC-insured bank — it’s how the FDIC protects your money in the event of a bank failure. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. And you don’t have to purchase deposit insurance. If you open a deposit account in an FDIC-insured bank, your funds are automatically covered.

As an example, a married couple’s joint account would be covered for $500,000, and a mother with three children listed as beneficiaries on her account would have coverage of $250,000 per person, for a total of $1 million.

In addition, this coverage is at the institution level, so an individual can maintain funds in multiple bank accounts and get FDIC coverage up to the applicable amount at each institution (note that this does not extend to a different branch of the same bank).

How To Get Additional FDIC Insurance Coverage

There are several ways to obtain additional FDIC insurance coverage:

  1. Add another person to your individual account. You can make your account a joint account. Adding multiple beneficiaries allows for each to get $250,000 of coverage.
  2. Deposit funds at multiple institutions.
  3. Ask if your institution can help spread out your funds electronically using Certificate of Deposit Account Registry Service (CDARS) or Insured Cash Sweep (ICS). Both spread funds across multiple institutions electronically, one using CDs and the other using funds from money market accounts, with coverage up to $50 million.
  4. Explore alternatives. For example, Flourish, a wholly owned subsidiary of MassMutual, offers FDIC insurance coverage up to $3 million for joint accounts by spreading deposits among its network of FDIC-insured institutions.

How To Get Additional U.S. Government Backing

The FDIC holds only a small percentage of cash as a reserve, instead relying on the full faith and credit of the U.S. government to assist in any shortfalls. With this in mind, one could also invest in U.S. obligations such as Treasury securities or other government securities either directly or by using a money market fund. Investors may wish to take advantage of using a money market fund that invests in underlying holdings, as this offers the advantage of convenience, diversification and liquidity.

As an example, both Schwab and Fidelity have numerous money market funds, and one should understand that only the government or Treasury funds offer this backing. Not all funds are created equal, and depositors should do their research as to what a particular fund invests in and opt for those funds that are essentially either Treasury or government holdings. Find your CFP® professional today to help you get started.

This article was originally published on CFP® 

Charles Sachs, CFA, CFP®, is a Chief Investment Officer at Kaufman Rossin Wealth, LLC, a Registered Investment Adviser.