Bear Stearns scenario for Fidelity/Vanguard

[Edward64]

Simple question but I am having trouble finding the answer on the web.

If Fidelity/Vanguard mutual fund companies were to experience a panic by the customers (ex. bad accounting, some funds goes belly up, embezzlement etc) is it possible for an investor to lose all/part of their 401K, IRA investments in Fidelity/Vanguard?

[cartman]

The answer is, it depends. Brokerage IRAs are not insured by the FDIC. I believe that for most other retirement accounts, the FDIC insures them up to $250,000.

http://www.fdic.gov/regulations/laws/federal/2006/06final912.html

[cartman]

Dola,

Here's another page that explains it a bit clearer:

http://moneygirl.quickanddirtytips.com/fdic-insurance-questions.aspx

The $250,000 coverage is for cash deposits only. There are supposed to be safeguards in place to keep institutions from accessing 401K and IRA funds that are tied up in non-cash securities.

[digamma]

Mutual funds aren't bank accounts. They are investments. You own a share of a mutual fund company and the company holds shares or other assets in other companies. They have daily net asset values (NAV) that are marked to market. So, if there is market fluctuation, your investment will gain or lose value. In a catastrophic market event, you could lose everything.

You aren't really concerned about a run on a mutual fund because of the daily mark to market and the fact that mutual fund redemptions will settle on a T+1 to T+3 basis (there are safeguards to prevent market timing).

The one exception may be 2a-7 mutual funds, which are money market funds and are "Stable Value NAV" funds--the NAV is always $1, balanced by some relatively better assets and some relatively worse assets. If there was a run on a 2a-7 fund, then, in theory, the investment manager could sell better assets to give redeeming shareholders their $1 NAV and the remaining shareholders are left with relatively worse assets and wouldn't be able to be redeemed for the full dollar. the fund would have "broken the buck." Most 2a-7 funds are backed by large banks, and the bank would step in to make the fund whole to protect the $1 NAV (though they are not required to do so, as a matter of marketing and public relations there would be extraordinary pressure on the bank to do so).

In sum, in a regular non-money market mutual fund, you're risks are market risks of the assets in which the fund invests. And you can certainly lose money.

[Edward64]

In reading your replies (thanks btw) I don't think I expressed my question clearly. Let me try again with a scenario.

Here is an example.

I have a Fidelity 401K of $500K in various mutual funds that was bought through Fidelity.
a. $300K is in Fidelity Funds (traditional 401K account)
b. $200K is in non-Fidelity Funds (brokerage 401K account)

If for some reason, Fidelity collapsed (ex. we find out there was a rogue trader ala Barings or Societe Generale) and the Feds come in (of course they will to stabilize the situation) ... what amount of my $500K is at risk?

My example is if Fidelity mutual fund company itself craters, not companies that my Fidelity mutual funds hold. In that latter example, I understand clearly that my Fidelity mutual fund NAV will be lowered..

[cartman]

The way I understand it, the funds invested in securities are firewalled, and the company couldn't touch those funds to cover operating expenses.

[digamma]

A mutual fund is a separate company-a registered investment company. Fidelity has no access to the assets--they are held by a custodian.

[st.cronin]

The way I understand it, the funds invested in securities are firewalled, and the company couldn't touch those funds to cover operating expenses.

I think this is generally correct, I think its more or less as though you actually owned shares of the securities the fund owns, although technically you just own shares of the fund.

[Edward64]

Thanks for the replies.

I think you are telling me basically my risk is in the companies that the mutual funds owns, not Fidelity itself which created the funds.

Therefore, any mutual funds that were run by Bear Stearns is still 'good' for its clients?

[digamma]

I'm not sure Bear Stearns Asset Management has a very large mutual fund offering, but that is neither here nor there.

Bear Stearns stock price wouldn't affect the NAV of a Bear managed mutal fund unless there was exposure to Bear within the fund (and there are rules limiting such transactions by a fund sponsor/investment manager).

Now, there could of course be some trickle down effect--Bear's troubles cause its top talent to look around, leave Bear or mentally check out and the performance of the fund suffers. But that's a different question and, i think, a different use of the word "good."

[digamma]

Appendix A in this ICI (Investment Company Institute) factbook is a good primer on how mutual funds are organized. In particular note the description of the Fund Custodian and requirement to maintain the fund's assets in a segregated account.

http://www.ici.org/funds/abt/2007_factbook.pdf