Fidelity Accounts: Are My Investments Insured?

If you're considering investing your money with Fidelity, you may be wondering if your money will be insured. Fidelity offers a Cash Management Account which is a brokerage account that allows you to spend, save, and invest. While the account itself is not FDIC-insured, uninvested cash balances are eligible for FDIC insurance. The FDIC-insured Deposit Sweep program sweeps your uninvested cash into an FDIC-insured interest-bearing account at one or more program banks. This means that your money is protected even if your brokerage firm goes bankrupt. However, it's important to note that there are coverage limits, and any amounts over those limits may be swept into a money market fund, which is not FDIC-insured.

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The FDIC-Insured Deposit Sweep Program

The program banks will receive a maximum of $245,000 to ensure that any accrued interest is eligible for FDIC insurance, which has a $250,000 coverage limit. For example, if a customer deposits $500,000, $245,000 will be swept into each of the first two available program banks, and the remaining $10,000 will be swept into a third. If the customer then deposits another $50,000, that amount will be deposited into the same third program bank.

Deposits that exceed FDIC insurance limits or cannot be swept to a program bank due to a lack of bank capacity or unavailability of FDIC insurance are placed in the Money Market Mutual Fund Overflow, or Money Market Overflow. This component was introduced as an enhancement to the FDIC-Insured Deposit Sweep Program. Funds in the Money Market Overflow are not FDIC-insured but are eligible for SIPC coverage under SIPC rules. The SIPC, or Securities Investor Protection Corporation, is a nonprofit organization that protects stocks, bonds, and other securities in the event of a brokerage firm bankruptcy.

It is important to note that the FDIC-Insured Deposit Sweep Program is not available for all Fidelity accounts. For example, the Retirement Account and the Health Savings Account have different disclosures regarding the program. Additionally, the Cash Management Account itself is not a bank account but a brokerage account, and brokerage accounts are not FDIC-insured. However, uninvested cash balances in these accounts are eligible for FDIC insurance through the FDIC-Insured Deposit Sweep Program.

Securities Investor Protection Corporation (SIPC)

The Securities Investor Protection Corporation (SIPC) is a federally mandated, non-profit, member-funded corporation created by Congress under the Securities Investor Protection Act (SIPA) of 1970. The SIPC is not a government agency or a regulator of broker-dealers. Instead, it is a private corporation that protects investors' securities and cash left with brokerage firms against loss from financial difficulties or failure.

The SIPC has been protecting investors for over 50 years and has recovered billions of dollars for investors. It protects the small investor, not the large investor, since there is a limit on reimbursable losses. The coverage limit is $500,000 (net equity) per cash/securities account, and $250,000 for cash-only accounts. If an investor has multiple accounts at a failing brokerage, the $500,000 limit is not applied per account, and the notion of "capacity" is used instead.

The SIPC steps in when a brokerage firm fails financially and assets are missing from customer accounts. It protects customer assets when a SIPC-member brokerage firm fails financially, and it protects most types of securities, such as stocks, bonds, and mutual funds. However, it does not protect against losses caused by a decline in the market value of securities or investment contracts not registered with the SEC.

To qualify for SIPC protection on an unauthorized trade, the investor must demonstrate that the trade was, in fact, unauthorized. It is important to send a complaint in writing to your broker as soon as you become aware of an unauthorized transaction. SIPC protection does not apply when investors place their cash or securities in the hands of a non-SIPC member, so it is important to ensure that the brokerage firm and its clearing firm are members of SIPC.

Money Market Mutual Fund Overflow

Money market funds are mutual funds that invest in debt securities with short maturities and minimal credit risk. These funds are not insured by the FDIC and are subject to market risk. While they are required by federal regulations to invest in low-risk investments, there is no guarantee that the value of your investment will be preserved.

Fidelity's FDIC-Insured Deposit Sweep Program offers an FDIC-insured interest-bearing account at one or more program banks. Under certain circumstances, this program also includes a Money Market Mutual Fund Overflow component, also referred to as the Money Market Overflow fund. This component is utilised for cash balances that exceed the FDIC-insured Deposit Sweep Program's capacity or limits. While deposits swept into the program banks are eligible for FDIC insurance, balances in the Money Market Overflow are not. Instead, they are eligible for SIPC coverage, which protects customer accounts up to $500,000 in securities, with a $250,000 limit on cash claims.

The Money Market Overflow fund serves a specific purpose in the event of debits to your account. When your funds are placed in this fund, they will be the first to be used to settle any debits. It is important to note that investing in a money market fund carries the risk of losing money.

Fidelity offers various money market mutual funds, including the Fidelity Government Money Market Fund (SPAXX) and the Fidelity Treasury Fund (FZFXX). These funds are designed to provide investors with a high level of current income while preserving capital and liquidity.

While money market funds are considered relatively safe, it is essential to recognise that they are not entirely risk-free. In rare cases, such as during the Lehman collapse, a money market fund may "break the buck," dropping below the $1.00 share price. However, such extreme events are uncommon, and Fidelity has a long history of managing these funds effectively.

Fidelity Cash Management Account

The Fidelity Cash Management Account (CMA) is a brokerage account that allows you to spend, save, and invest. It is not a bank account. The account offers competitive rates, as well as spending and money movement features, including a free debit card, check writing, Bill Pay, and more.

The CMA is intended to complement your existing brokerage account, allowing you to separate your spending activity from your investment activity. It offers features such as free mobile check deposit and mobile Bill Pay via the Fidelity mobile app, and a no annual fee debit/ATM card with ATM fee reimbursements.

The CMA offers Federal Deposit Insurance Corporation (FDIC) protection on any cash you don’t invest. This money is allocated across multiple partner banks and is insured up to $250,000 per partner bank. The FDIC-insured Deposit Sweep program sweeps your uninvested cash into an FDIC-insured interest-bearing account at one or more program banks. Deposits swept into the program bank(s) are eligible for FDIC insurance, subject to coverage limits.

The CMA also provides overdraft protection and automated transfers. You can set target balances, make transfers, and establish the order of linked accounts to fund your CMA, ensuring you don't overdraw.

The account has no account fees and no account minimums to open, making it a smart digital alternative to traditional banks.

FDIC insurance coverage limits

The Federal Deposit Insurance Corporation (FDIC) insures deposits at FDIC-insured banks in the event of a bank failure. FDIC insurance covers depositors' accounts at each insured bank, including principal and any accrued interest, up to the insurance limit. The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. This means that if you have multiple accounts in different ownership categories at the same bank, you may qualify for more than $250,000 in FDIC deposit insurance coverage. For example, if you have a single ownership account and a joint ownership account at the same FDIC-insured bank, you will be insured for up to $250,000 for your single ownership account deposits and up to $250,000 for your ownership interest in the joint account.

Fidelity offers an FDIC-Insured Deposit Sweep Program for its Cash Management Accounts and Retirement Accounts. Under this program, cash balances are swept into an FDIC-insured interest-bearing account at one or more program banks, making them eligible for FDIC insurance subject to coverage limits. Any amounts over the FDIC coverage limits may be swept into a money market mutual fund, which is not FDIC-insured but may be eligible for SIPC coverage.

It is important to note that brokerage accounts, such as the Fidelity Cash Management Account, are not FDIC-insured. However, uninvested cash balances in these accounts may be eligible for FDIC insurance through the sweep program. Additionally, prepaid cards that meet certain FDIC requirements are insured up to $250,000, along with any other funds in the same ownership category at the same bank.

To determine the exact coverage limits for your specific situation, you can use the FDIC's Electronic Deposit Insurance Estimator (EDIE) tool, which can help you calculate how much of your funds are covered by FDIC insurance.

Frequently asked questions