The Derivative Project

Attention Retirement Savers: Time for Immediate Demand for Alternative to Money Market Funds and Your “Voluntary Recapture” from Wall Street

Attention Retirement Savers: Time for Immediate Demand for Alternative to Money Market Funds and Your “Voluntary Recapture” from Wall Street

Today is Labor Day or a time to celebrate the economic and social contributions of our nation’s workers.  Take a look at this as we celebrate.

Schwab’s Retirement Advantage Money Market Fund Fine Print or Why Retirement Savers will Never Get Ahead
Here is an excerpt from Schwab’s SWIXX prospectus on Voluntary Expense Reimbursement/Recapture:  
“Voluntary Expense Waiver/Reimbursement
In addition to the contractual expense limitation agreements noted above, Schwab and the investment adviser also may waive and/or reimburse expenses to the extent necessary to maintain a positive net yield for the fund. Schwab and the investment adviser may recapture from the fund any of these expenses or fees they have waived and/or reimbursed until the third anniversary of the end of the fiscal year in which such waiver and/or reimbursement occurs, subject to certain limitations. The reimbursement payments by the fund to Schwab and/or the investment adviser are considered “non-routine expenses” and are not subject to any net operating expense limitations in effect at the time of such payment. This recapture could negatively affect the fund’s future yield. There were no prior year amounts recaptured. As of June 30, 2012, the balance of recoupable expenses is as follows:
    Expiration Date    
December 31, 2012 – $26,653,803
December 31, 2013 –  $47,297,540
December 31, 2014 –  $59,017,389
December 31, 2015 – $30,733,891
Total                         $163,702,623″  
Wow, is that creative!  Or, one can say that is just plain hubris and quite hedonistic.  Wall Street believes they are entitled to profits that are no longer feasible with their product and they are ensuring these profits will be delivered by the unsuspecting retirement saver who is told in the bold print, we are here to help you, we are your trusted advisor, but in the fine print they are taking every last dime that you are trying to save.  Wall Street does not have to sacrifice their profits in a low interest rate environment, Charles Schwab has determined it is the worker, that must sacrifice future returns in their employer’s mandated money market mutual fund to ensure Schwab’s profits continue despite any economic scenario.  Wow!
Description of Schwab Retirement Advanatge Money Market Fund (SWIXX)
The investment seeks the highest current income consistent with stability of capital and liquidity. The fund invests in high-quality short-term money market investments issued by U.S. and foreign issuers, such as: commercial paper, including asset-backed commercial paper; promissory notes; certificates of deposit and time deposits; variable- and floating-rate debt securities; bank notes and bankers’ acceptances; repurchase agreements; obligations that are issued by the U.S. government, its agencies or instrumentalities, including obligations that are not guaranteed by the U.S. Treasury.
There is a Monopoly Created by the Wall Street Oligarchy – Money Market Mutual Funds
The death of an honest day’s work for an honest day’s pay is no more evident than in the obsolete money market model that the SEC failed to revise and regulate last month.  Schwab’s Retirement Advantage Money Market Fund is neither honest nor do they do any work for the expenses they charge.  There is no value added to the investor.  The product is a drain on any retirement investors’s savings.
Investment Advisers, regulated by the SEC, have a fiduciary duty to operate in your best interest if they are paid a fee for investment advice. The Department of Labor’s ERISA standards also require that any mutual fund and adviser to a retirement plan must act in the best interest of retirement investors.
SEC Registered Investment Advisers and ERISA Advisers are breaching their fiduciary duty by placing trillions of dollars of American’s life savings in fund options that are yielding negative returns, now, or in the near future, when there are both safer and higher yielding options.  
Why is the Money Market Mutual Fund model Broken?  It Breaches the Investment Company Act of 1940,  ERISA standards and the Investment Advisers Act of 1940

In the early 1980′s, when money market mutual funds first came into being, institutional mutual funds took the advantage of higher rates in safe, high quality short term assets, such as A-1, P-1 commercial paper and bankers acceptances and came up with a model to pass along these higher rates to average savers.  It produced fair profits to the mutual fund companies and higher returns for the retail investor. Interest rates were vey high in the early eighties and money market mutual funds offered a safe, high quality investment yielding more than a traditional bank certificate deposit, even after the mutual fund took their high fees.
Today, a money market mutual fund has two significant issues that renders its model obsolete.
  • To earn higher fees, the money market mutual fund industry has misrepresented its objective to retirement investors and has moved into riskier assets.  They are stuffing these funds with whatever they can to determine how they can stay in business.  There will be a more detailed blog post on this systemic risk issue.
  • Given traditional expense structures and profit margins in money market mutual funds, mutual fund firms can no longer earn the profits they did when short term rates were higher and in a slow- perhaps stagnating economy.  They either deliver negative results to unsuspecting investors, such as Federated does, or they charge the maximu
    m fees they can to deliver a .01% return to money market mutual fund investors, which is less than the investor could earn on a comparable maturity FDIC-insured CD..
How is this an Abuse of Fiduciary Duty and a Violation of ERISA?
Charles Schwab and other money market mutual fund companies are stating these are short-term instruments with “stability and liquidity.”  This is misrepresentation.  Money market mutual funds have created instruments with excessive systemic risk, caused by utilizing excessive amount of “guarantees” by major Tier I commercial banks and as in the case of Lehman Brothers repurchase agreements, systemic risk may prove disastrous, as in the case of the Reserve Fund.
The Fund Description states the Schwab Retirement Advantage Fund  seeks “the highest current income.”  As the attached graph from U.S. Bank current CD rates, FDIC insured indicates, this fund is producing a lower return than an FDIC insured CD at US bank.  An ERISA fiduciary has the duty to disclose all material facts and to put the interests of the retirement investor over that of the Adviser.  Charles Schwab is misrepresenting in its Prospectus and money market fund description that it is delivering a product that is safe and providing the “highest current income.”
A comparable FDIC insured CD at US Bank would yield .05% and the Charles Schwab Retirement Advantage Money Fund is yielding 01%, with more risk. 
This fund is providing the lowest current income to a retirement investor, with significantly greater risk.  Further,  as the Prospectus states:  “This recapture could negatively affect the fund’s future yield.”
Thus, Charles Schwab, through its Schwab Retirement Advantage Money Market fund is taking away from retirement investors a safe investment that would yield a higher return, but representing they are providing a product with a safe and “highest” return.  Existing securities laws prevent misrepresentation.  ERISA demands that the Adviser act in the best interest of the retirement investor.  SWIXX is not in the best interest of the retirement investor, when they are readily available safer, higher yielding options.
Thus, if short-term rates tick-up, retirement investors will lose.  The money market funds will increase their expenses and/or continue their “voluntary recapture” program.  With higher interest rates, inflation will increase, retail prices will increase, but retirement savers will get behind due to higher retail prices, but no commensurate gain in their money market savings.
What Must Congress, the Department of Labor and the SEC do? 

Allow retirement savers immediate access to sweep options that eliminate money market mutual funds.  Provide FDIC CD purchases through an self-directed option for those that want safety, without the excessive fees and higher returns.   Allow a sweep option to FDIC insured CD’s, that may have higher expenses due to administrative fees, but does provide a safer option than say Schwab’s Retirement Advantage Money Market fund, with the same return.
Analyze the “assets” that money market funds are placing into money market funds.  Do they cause systemic risk and how will that systemic risk be handled?  Once again, examine imposing additional capital reserves or eliminating the fixed net asset value (NAV).
Finally, there is an election in November.  This is a mainstream issue.  President Obama, Candidate Romney, where do you stand on allowing retirement savers access to cost-effective retirement savings options?  Do you believe that money market mutual funds have the right to recoup their foregone profits, through their “voluntary recapture” programs?  Should retirement savers also be given a “voluntary recapture” program for the losses they had in their retirement accounts since SEC registered investment advisers and ERISA advisers sat idly by and allowed the unnecessary $2 trillion dollars in losses in their retirement accounts during the 2008-2009 financial crisis?  
Do retirement savers have the right to recapture their lost income by ERISA funds that prevented access to safer, FDIC insured CD’s that offered higher returns than money market mutual funds?
How much money have retirement savers lost since Wall Street breached ERISA rules and put their interests over the interests of retirement savers?
One would expect President Obama and Presidential Candidate Romney would outline for every worker their “voluntary recapture” program for every retirement savers’ loss of income due to Wall Street, such as Charles Schwab’s retirement money market funds, representing that their retirement money market mutual fund was safe and provided higher income that an FDIC-insured bank CD.
Candidate Romney, Vice President Candidate Ryan, President Obama, do Wall Street’s money market mutual funds cross a line?  Are they in society’s best interest? Has Wall Street overstepped its bounds and is it time for our government to step in to promote what is in the best interest of society?
On Labor Day 2012,  is it time Wall Street returns to our nation’s mantra, “An honest day’s work, for an honest days pay”?   The fleecing of our workers retirement savings, without delivering any value, is not an honest day’s work.