Beyond traditional FDIC coverage: More about what is -- and isn't -- federally protected

NEW YORK -- Many more of you responded to my Sept. 19 column on how FDIC insurance works to cover time deposits, and how to extend that coverage to cover sums larger than $100,000. Good questions, good ideas, good feedback -- as I like to see in the Millionaire Zone.

So I thought I'd take the dialog "15 minutes" further with at least one more good way to extend FDIC coverage on large sums. And -- as many of you wondered -- is similar coverage available for mutual funds, investment accounts, retirement accounts and the like? The answer: basically none. I'll cover that too.

The previous article explained how the Federal Deposit Insurance Corporation covers bank deposits, including CDs and similar products, up to $100,000 per unique depositor per unique and chartered institution. See previous Jennifer Openshaw.

But if you have $500,000 to deposit, you can expand coverage by adding accounts in spouse names, joint accounts, trusts, IRAs -- and of course, by spreading the wealth to more institutions.

Under the CDAR tree

One reader pointed out CDARs -- the Certificate of Deposit Registry Service -- which effectively spreads assets for you. A few years ago, the Promontory Interfinancial Network, a network of mostly small, regional business-oriented banks, was set up to do this.

I was familiar with CDARs as a product for businesses and nonprofit organizations managing cash reserves, but didn't know they were available for individuals. They are, and here's how they work.

Bring a deposit to a network bank. They divide your deposit up among member banks into insurable $100,000 CDs. It's largely invisible to you; you get one statement from the originating bank with returns pegged to a single interest rate, and you can get up to $50 million in coverage.

Is there a cost? It depends on the originating bank -- some may pay a rate slightly below best going rates for individual CDs. There are hundreds of member banks, but big names like Wells Fargo, Wachovia and J.P. Morgan Chase are absent. To learn more or find a member bank, the Promontory Web site is a good place to start. Visit the site.

Finding coverage elsewhere

As a general rule, if it isn't a bank deposit, you're out in the open:

• Investment products. When searching for federally insured investments, here's the rule of thumb: bank deposits are covered, investment products are not.

CDs and other fixed-time deposits are bank products. Mutual funds are not -- they are investment products. Remember this: a money market fund is a mutual fund, so it's an investment product -- even if it is sold through a bank.

• Brokerage accounts. Brokerage accounts advertise SIPC -- Securities Investor Protection Association -- coverage. That's nice, but SIPC only protects against the failure of the broker -- not, as the SEC puts it, "against losses caused by a decline in the market value of your securities." And only $500,000 in securities -- or $100,000 in cash assets -- are covered, so you may have to split assets among brokers as you would among banks for FDIC coverage. If a broker holding your securities in their "street name" goes under, you get a guarantee for like securities -- at their current value. If you have 1,000 shares of Can't-Miss Enterprises worth 10 cents each, SIPC guarantees your 1,000 shares back -- not cash, not original value. 

•  Pensions/Retirement plans. The Employee Retirement Security Act of 1974 provides wide-ranging protection against employee-benefit abuses. But ERISA doesn't protect the value of retirement assets. Instead, like SIPC, it provides account protection by holding employers and their plan administrators to a fiduciary standard. For defined-contribution plans, like 401(k)s or profit sharing plans, if the plan administrator absconds with your funds, you have recourse through the employer. But if asset values decline, you're on your own. The value of defined-benefit plans (pensions, mostly) is protected through the Pension Benefit Guaranty Corporation through complex formulas.

So, again, keep in mind that bank accounts are covered, most others are not, despite what you might hear. It's worth 15 minutes to check your coverage.

I don't recommend holding all assets in FDIC-insured accounts. It's better to diversify for greater returns and you probably don't need 100% protection. But it is nice to have at least some of them under the insured umbrella.