In the past few weeks the Securities Exchange Commission (SEC) proposed regulations that would require money market funds that are meant for large institutional investors to be valued at a floating net asset value rather than at the traditional $1.00 value. What does that mean and why should you care?
Today when you view the value of your money market mutual fund, the value is generally denominated in a dollar value, similar to your savings account. Unlike your other mutual fund investments, which are denominated generally in shares, that are given a net asset value and then converted to a dollar value, money market funds are easy to understand.
So why does the SEC want to value the money market funds differently in the future? During the financial crisis, one money market fund fell before the $1 per share value and was forced to be "bailed out"...in reality it was merged into another company's large fund and investors remained whole. Compared to the larger financial issues caused by the banks and insurance companies during the financial crisis, the mutual fund challenges were minimal. The SEC, however, believes that institutional investors are more savvy to when the actual value of a fund is falling below $1 per share and are more likely to redeem funds before the public becomes aware of a problem. Therefore, for all "prime" money market funds, those funds that are primarily used by large financial institutions and investment managers, the value will be a floating net asset value similar to other mutual funds. Mutual funds intended for "retail" investors, however, will remain at a dollar value. A "retail" mutual fund will not allow trades by a single shareholder of more than $1 million per day.
While few average investors will make trades of larger than $1 million per day, these regulations may still impact you. Why? If you hold assets in a money market fund in your 401(k)plan, it is likely that a prime fund is being used by your plan provider. It's likely that your IRA account, or perhaps other funds invested on your behalf by a financial advisor, could be invested in a prime account. It's possible that if you intend to buy or sell a home, or conduct another large financial transaction, you may need to use a non-retail fund due to the limits. But generally funds that you have invested on your own into a money market mutual fund will still be at a $1 value per share.
While your own accounts may not be subject to the new rules, it is likely that the cost that will be incurred by the mutual funds to provide basically two different accounting methodologies will be passed onto you. You may not see that cost directly in your account, but the overall operating costs of the funds will increase thus bringing your minimal return on your money market fund even lower.
Money market funds represent a reasonable portion of the investable assets held by investors of various wealth levels. Forty-eight percent of households with $100,000 to $1,000,000 of net worth own money market funds, while mutual funds make up about 11 percent of their portfolios. Seventy percent of households with $1 to $5 million of net worth and eight percent of households with $5 to $10 million of net worth own money market funds, and 16 percent of the investable assets of both wealth segments are made up of mutual funds. 75 percent of the households with more than $25 million own money markets, while 11 percent of their investable assets portfolios are comprised of mutual funds.
While wealthier households are more likely to have assets invested in prime funds, most households own mutual funds in their 401(k) plans. The accounts you monitor on a regular basis may not outwardly be impacted by these changing rules, however, you may ultimately notice the difference. Some providers have already changed their money market funds into a floating net asset value. For those investors who view their money market account as a checking account that earns interest, a change in the net asset value on a daily basis would be quite disturbing. While this is an unlikely outcome, it could occur in the future if providers decide the cost of dual accounting is cost prohibitive.
The new regulations are currently in the comment period so it is unclear how the rules will fare under greater scrutiny from the industry.
Catherine S. McBreen is President of Millionaire Corner. McBreen plans and develops content for Millionaire Corner. Catherine balances editorial content to meet the informational needs of both new and seasoned investors. She designs special monthly surveys on topical issues affecting the economic environment.
McBreen has a B.S. in speech communications from Northwestern University and a J.D. from DePail University College of Law. She is a member of the American Bar Association, the Illinois Bar Association, and the Chicago Bar Association.
Well-known for her expertise in the affluent and retirement arenas, McBreen is a frequent speaker at industry conferences. She has been quoted widely by the financial media, including The Financial Times, The Wall Street Journal, Research, Private Asset Management, On Wall Street, Reuters, Bloomberg News, The Dow Jones Newswires and Worth. Cathy has appeared as a guest on CNBC Closing Bell, First Business Morning News, Neal Cavuto at Fox Business News, ABC and CBS radio.
McBreen is co-author with Spectrem President George H. Walper, Jr. of the book "Get Rich, Stay Rich, Pass It On: The Wealth-Accumulation Secrets of America's Richest Families" (Portfolio, January 2008)
Catherine is the mother of four and is involved in many school and community events.