The two main changes:
- Some money funds may not be required to have a guaranteed stable $1-a-share value, which means the value of your principal could fall if the share price drops below $1.
- A money fund's management company will have the right to charge a redemption fee if you want your money back.
These new rules are a result of the 2008 financial crisis, when there was fear of a run on money market funds. In order to prevent an exodus and probable losses, the U.S. government stepped in to temporarily guarantee the value to investors. Theoretically, the new SEC mandates would help prevent that situation from happening again.
If your brokerage money market account is invested only in securities backed by the U.S. government, such as U.S. Treasury bills or other federal debt, the new rule doesn't affect you. (Such funds typically have the word "federal" or "treasury" in their name, though you should confirm with your brokerage company to make sure.) However, if your money market fund also invests in other types of debt, such as corporate securities or municipal bonds, it will be affected by the rule change.
A simple, but not optimal, solution is to call your broker and transfer your money market fund account to a federal money market fund. These typically pay less than other money market funds. For example, at Charles Schwab, the federal money market fund yields only 0.11 percent annually, while the money market fund with a hybrid of investments (subject to the new rules) yields 0.31 percent. With rates so low, you don't have to give up too much for this safety, as each $10,000 in a federal money market would only earn $11 a year instead of $31.
A better solution
There is now a much better way to both earn more and be safer. Stash your cash at a bank or credit union paying significantly higher rates. Make sure the bank is backed by the FDIC, and the credit union by the National Credit Union Administration. These are agencies of the U.S. government and, as such, offer greater protection against losses for at least $250,000 per depositor per institution. And the new SEC rules don't affect these bank money-market deposit accounts.
DepositAccounts.com lists several bank money-market deposit accounts earning over 1 percent and one as high as 1.29 percent. If you want to buy something from your brokerage account, you can transfer the funds from the bank electronically.
My advice is to seize the opportunity to earn more than three times the non-government-backed brokerage money market rate without having to worry about the value declining or a fee being imposed if you need the money. Earn more with less risk — what could be better?
Allan Roth is the founder of Wealth Logic, an hourly-based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.
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