Why Keeping Your Retirement Funds In One Place Pays Off
Q: I am retired with the majority of my assets in IRAs. For a sense of security I have kept my money in several accounts, with Fidelity and Vanguard. They’re far from a Bernie Madoff risk, but I figure why not spread it around just in case? I also worry about a cyber-attack on the holder of all my assets. Am I being too paranoid or could I safely consolidate all my eggs into one basket? — Bob Drahushuk
A: There are plenty of good reasons to consolidate your investments at one firm rather then spreading them over multiple accounts, says Mark Hebner, founder and president of Index Fund Advisors in Irvine, Calif. You'll find it easy to ensure that you have the right asset allocation, you can save on administrative fees, and some firms reduce transaction costs for larger balances. It means less paperwork, and you have just one firm to deal with when you want to make a transaction. It’s also simpler for your spouse and heirs when you pass away.
But if splitting your investments between two brokerages will give you peace of mind, do it, says Hebner. There’s no harm. You can use an account aggregator such as Mint.com or Quicken to keep tabs on your overall portfolio, he adds.
As for the risk of losing your money in a Madoff-like Ponzi scheme, keeping your money at large, well-respected brokerages, as you are doing, will mitigate that. You aren’t alone, though, in your concerns about cyber attacks on financial institutions. The Securities and Exchange Commission has beefed up its examination of brokerage cyber security policies. But most large firms, including Fidelity, Vanguard, and Schwab, have policies that guarantee reimbursement against unauthorized activity in your account.
Beyond Ponzi schemes and hackers, Hebner says that since the 2008 market crash, clients worry more about the risk of brokerage firm failing. You have protection there too.
The Securities Investor Protection Corp. (SIPC) steps in if a brokerage goes out of business and will reimburse your account up to $500,000 per account holder and per account (coverage of cash is $250,000). In the Madoff case, customers got money back that they deposited with him but not any of the fictitious profits Madoff claimed, says Steve Harbeck, SIPC president and CEO of SIPC, which is a non-government organization funded by member securities firms. “We protect cash deposited with an institution and any securities bought with that money for member brokerages.”
Brokerage bankruptcies are rare, though—just 328 cases since SIPC was created in 1970 and 625,000 customer claims. The SIPC has reimbursed $2.34 billion in claims and administrative costs, but that number is skewed by Madoff, which accounts for $1.8 billion of the $2.34 billion. Not including the continuing Madoff case, fewer than 400 people haven't received the full amount of their assets left with a collapsed SIPC-member firm because it was above the limit, according to SIPC. But most major brokerage firms also carry private insurance beyond SIPC limits known as "excess SIP insurance."
That should give you peace of mind whether or not you consolidate your accounts, says Hebner. But do whatever helps you sleep at night.
“There’s enough to worry about when it comes to the ups and downs of the financial markets. You should feel as comfortable as you can about any possible risks to your account,” says Hebner.