The Derivative Project

Retirement Investors: A Huge Reason to Ditch Money Market Funds Now

Retirement Investors: A Huge Reason to Ditch Money Market Funds Now

We have written in previous Blog Posts about the concept of “voluntary recapture.”  Well, look out it is coming!  Time to protect your .01% money market yield, from the fees that money market funds believe they deserve for babysitting your cash.
Brokerage firms, such as Schwab and Federated have had their stocks already peak in anticipation of the fees they will receive by charging any investor in a money market account, their pent-up fees, resulting from the low interest rate environment.
Here is a good summary from Yahoo Finance’s Blog:  Unexpected Returns – June 24, 2013
What is Voluntary Recapture?

Money market funds have fixed expenses.  Because overall yields have been so low, they have waived these expenses, since they were concerned investors would not be happy if they debited their accounts each month for their fees.  So, the money market funds, like Federated and Schwab have decided as soon as interest rates rise, they are going to charge your account for all these past expenses they could not charge you when interest rates were so low.  They will take as much as they can over the next three years from your account.
Questions for Retirement Investors to Your Advisors

Has your advisor told you about the “voluntary recapture” plans?
Has your advisor told you how much Schwab or Federated may be taking from your account for their “expenses” over the next three years?
Has your advisor presented alternatives to money market funds so one is not forced to lose yield in an other wise exceedingly low interest rate environment?
Money markets have never existed in a low interest rate environment.  Their value is really for the flexibility of the brokerage firm as a place to sweep dividends or interest, until the next investment is made.  There are other ways for retail investors to achieve higher returns and not be subject to the flawed money market mutual fund model in a low interest rate environment.
What Are Investor Alternatives?

If you want to hold a cash position, one alternative is to buy Treasury Notes in the 1-3 year range.  The Two Year Treasury Note is yielding .39% as of yesterday.  A money market account is at .01% – .05%.
Certain FDIC insured CD’s can be bought yielding .40%, as of yesterday for 6 months.
There is no reason to let your cash still idle and incur charges that money market funds should have determined a better way to manage in this unprecedented environment.
A Philosophical Question

If the product that the brokerage firm is selling you costs more to create than it can deliver in value, is this not a flawed product that the consumer would not want?
Why should the consumer have to absorb the costs of this flawed product?  It is not the consumer or investor’s fault that one is in an unprecedented interest rate environment.
We recommend taking charge of your cash.  Take the time to ask your Advisor to sweep it out immediately to FDIC insured CD’s or Treasury Notes.  Better yet, if you do not have an Advisor, it is easy to do it yourself, with a small investment in time.  
Move your cash to Treasury Direct and manage your cash yourself if balances accumulate in your brokerage money market account.  You can also buy FDIC insured CD’s online at your brokerage firm.
In sum, the brokerage industry decided to continued this flawed product in this low-interest rate environment, with the expectation when interest rates rise, it will once again become the “cash cow” for money market fund providers, that it has been for decades.
Don’t let your hard-earned savings be part of the fees that money market funds believe they deserve, on your nickel.