Will New Money-Market Fund Rules Endanger Your Cash?

Dollar bills
Ever since the financial crisis, regulators have worried about the safety of money-market mutual funds, where U.S. investors had $2.8 trillion parked as of last month. The Securities and Exchange Commission has approved two rules to make money-market funds safer, but in the process, some believe that the rules' restrictions could create as many problems as they solve.

The New Money-Market Rules

First, institutional money-market funds must now disclose the value of each fund share to four decimal places, allowing prices of money-market funds to vary by as little as a hundredth of a cent on shares typically priced at $1. That rule has dramatic implications for the money-market funds that large institutional investors make. It means that those funds will have to be much more precise in managing the value of their investments to avoid the stigma of "breaking the buck" and potentially causing investors to lose principal on what's supposed to be a highly secure investment. But the SEC resisted pressure to impose similar restrictions on the retail money-market funds that millions of Americans use to stash their cash. That means that those commonly used funds will be able to keep pricing their shares in full pennies to two decimal places.

The second change affects all funds. It requires them to impose restrictions on withdrawals under certain circumstances. Under the rules, funds are required to impose a 1 percent fee on requests from shareholders to sell their money-market fund shares if the amount of easily saleable investments in the fund drops below 10 percent of its total assets. Moreover, money-market funds can choose to impose a 2 percent fee if liquid asset levels fall below 30 percent, although such a fee requires a yes vote from the board of directors of the fund. Even more alarmingly, the 30-percent threshold also triggers the right for fund directors to prohibit withdrawals entirely for up to 10 days.

What the Rules Mean for You

In evaluating the impact of these rules on the average saver, money-fund analysts disagree. Some believe that the rules essentially make no changes for ordinary investors, because funds will hesitate to use their newfound powers for fear that they will scare their shareholders into moving their money to competitors who choose not to impose fees or prevent withdrawals.

Yet others believe that the rules could worsen any eventual future financial crisis. With the threat of halting redemptions, shareholders anticipating a problem could rush to get their withdrawal requests in early before any fund-imposed restrictions take effect. That could create exactly the run on money-market funds that the rules were designed to prevent.

The real question money-market fund investors should ask, though, is whether it really makes sense to use the funds at all in the current interest-rate environment.

With the Federal Reserve having long held short-term rates close to zero, the average money-market fund pays just 0.01 percent. By comparison, many FDIC-insured bank savings accounts pay close to 1 percent, or almost 100 times as much as most money-market mutual funds, which aren't insured by any government agency.

Money-market funds will continue to play an important role in helping large institutions manage their money, and the new rules should go a long way toward making the money-market fund environment safer for them. For the average investor, though, money-market mutual funds haven't made sense as a place to set aside your cash for years, and the new rules don't do anything to make the funds more attractive than higher-paying savings alternatives.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+. For more on getting more income to give yourself a comfortable retirement, see our free report in which Motley Fool retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule to boost your retirement income.

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John Roberson

the interest rate that brokers and banks used to pay on money market accounts used to be in the 5- 6% range. Then these institutions figured out a way to cheat the American consumer out of that interest while still reaping huge profits by loaning out those funds to their customers. The American people are so fooled by these entities and the government that is supposed to be their protector, that they blindly will walk off a cliff to continue to support them. And what will these entities do in the future, but stab us in the back and twist the knife and convince us that we should be more like the slaves we already are!!!!!

August 05 2014 at 12:44 PM Report abuse +1 rate up rate down Reply

Money-market rules have always endangered one's cash, and these new ones would be no different.

August 05 2014 at 12:40 PM Report abuse +1 rate up rate down Reply

So much for price controls on money. I guess the big institutions are short. They have to charge for withdrawals. The economy is 'inflated'. Solution? Higher interest rates. They benefit savers, retirees, corporations, insurance companies, charities, everyone. Almost.

August 05 2014 at 11:30 AM Report abuse -1 rate up rate down Reply
1 reply to moretrorun's comment

And higher interest payments on national debt?

August 05 2014 at 11:34 AM Report abuse -2 rate up rate down Reply
2 replies to gfy.gfy's comment

Time for the Government bigwigs to get THEIR financial house in order and cut back the spending to help pay off THAT debt! You know, like the rest of us must do!

August 05 2014 at 12:23 PM Report abuse rate up rate down

If your government believes that the best way to eradicate trillions of dollars of debt is to spend trillions more, you must live in a country run by idiots.

Obama promised to cut the deficit in half; instead he gave us five consecutive trillion dollar deficits. He promised to spend responsibly; instead now owns the title of biggest spender in world history. He called Bush’s $4 trillion in debt over 8 years reckless, then proceeded to pile on $7 trillion in only 5 years. He swore to be on the side of small business, but he added 6,118 new rules, regulations and mandates in just the last 90 days. He claimed taxes are low, yet he just raised taxes to the same level as bankrupt EU countries like Greece, Spain, Italy and France. Our federal income taxes are now far higher than former Soviet Republics.
Now I ask you-
---- Does this sound like a man trying to “save” us?

August 06 2014 at 5:49 PM Report abuse rate up rate down

Did you notice the SAVINGS CENTER is sponsored by Bank America? I use to trust them. Not anymore. We have severed our relationship with them and moved our banking away. Next: Merrill Lynch.

August 05 2014 at 9:13 AM Report abuse -1 rate up rate down Reply

If you can't access your money, freely, why have the account.

August 05 2014 at 8:51 AM Report abuse rate up rate down Reply
1 reply to jdykbpl45's comment

especially for a .01 % return

August 05 2014 at 9:50 AM Report abuse rate up rate down Reply
1 reply to SPQR's comment

Or stash it under your mattress for a negative return.

August 05 2014 at 11:36 AM Report abuse -3 rate up rate down