Money Markets. There are new rules. Are you ready? 1

Transcription

1 Money Markets There are new rules. Are you ready? 1

2 Could you be blocked from withdrawing your money market dollars or be subject to new fees for taking out your own money? 2

3 Money Markets have traditionally been viewed as a safe place to put money. A place with no fees or barriers to easily withdraw your money whenever you want to. The 2008 financial crisis has led to new rules that may affect your money market! 3

4 There are two basic types of Money Markets. One type will be affected by these new rules; the other will not. First, let s understand the two basic types of accounts that are called Money Markets. 4

5 Money Market Accounts are: Offered by banks and other financial institutions Earn interest in a similar way to a savings account. Are FDIC insured 5

6 FDIC insured means that your money market account is federally guaranteed. If your bank were to go bankrupt, the federal government will reimburse up to $250,000 of your money. 6

7 Money Market Accounts are NOT affected by the new regulations. Now let s look at the Money Market Fund that does have some new and important rules you need to know. 7

8 Money Market Funds are: Offered by mutual funds, brokerage firms and banks The new rules DO affect this type of Money Market! 8

9 The Money Market Fund is actually an investment, as opposed to a savings-type account. Money Market Funds are typically held with other investments you may own, such as stock or bond funds. 9

10 The purpose of Money Market Funds has been to provide a safe place for an investor to park their cash so that it is easily accessible to transfer to and from other investment accounts. 10

11 Money Market Funds earn a dividend, rather than interest. Earns Interest Earns Dividend 11

12 Generally, when a company makes profits it distributes a portion of those profits to those who invest in the company. Money Market Funds distribute dividends to those who invest money in the fund. 12

13 Traditionally, there are no fees or charges for withdrawing your money from a Money Market Fund. savings account; even for their Emergency Money. We need to rethink how we look at this! Because of all these convenient features, people have become comfortable using Money Market Funds as a type of 13

14 If you own a Money Market Fund, there are three important new changes you need to know about! Again, these changes do not affect Money Market Accounts Only Money Market Funds. 14

15 The SEC, which stands for the Securities and Exchange Commission, sets banking regulations and wants to encourage investors not to withdraw their money from accounts during times of economic or financial stress. 15

16 To prevent a run-on thebank, Money Market Funds will be allowed to charge fees of up to 2% of the amount you want to withdraw during a time of stress. 16

17 For example, if you have $1,000 in a Money Market Fund and the fund implements the fee, it will charge you $20 to take your own money out of the fund. Under certain conditions, the fund may be required to charge a 1% fee on your redemption. 17

18 The new regulations also give the Money Market Fund the power to impose a waiting period called a Gate. This would temporarily stop you from withdrawing your money for up to 10 days. 18

19 We have yet to see if these new powers will be used by the Money Market Funds. The fees and gates are both part of the new law that takes effect September 20 th,

20 A third part of the new regulations will take affect in two years. Market Funds through their 401K plans. This rule is said to affect big institutional investors But Surprise! Many individuals own institutional Money 20

21 In the past, every $1 you parked in your Institutional Money Fund maintained its $1 value. It traditionally has not increased or decreased in value, except for the additions of the dividends that it earns. This will change! 21

22 The Money Market Fund is really an investment. Investments, like stocks may go up or down, but the Money Market Fund has always kept a steady value. 22

23 When the rule takes affect, the value of your $1 will float. It will go up or down based on the way the fund invests your money. That means that $1 could be $1.05 when you want to withdraw it, or 23

24 it could be.97cents. The new rule allows each dollar invested in a Money Market Fund to fluctuate or float either up or down in value. 24

25 Big institutional investors won t wait two years. If you have an Institutional Money Market Fund as part of your 401k, the Fund Manager will start analyzing and making moves during the next two years in order to get a head start for the day when this floating rule takes effect. 25

26 Will my account be affected by these three new rules? Which do I own? It can sometimes be difficult to know what type of money market you have, as they are not always clearly labeled. 26

27 For example, an account might say cash reserves when it is actually a money market fund. which type of money market you have. Your 401k may not clearly say Institutional either. Please contact your advisor, bank, brokerage company or plan administrator to confirm 27

28 What do I do now? 28

29 Accounts are not subject to these new rules. For individuals nervous about the fees or the gates, you can consider moving your money out of a Money Market Fund and into a Money Market Account. Money Market It is especially important if you are currently using your Money Market Fund for your emergency savings. Contact your bank or advisor to find out if this is the right move for you. 29

30 A Money Market Fund comes with lots of conveniences for an investor buying stocks or stock funds. People like the ease of transferring money between an investment fund and a Money Market Fund. If this is an important convenience to you, just keep in mind the potential fees and gates that you may face down the road and incorporate that into your investment plan. 30

31 Individual investors may want to contact their 401k plan providers to see if there are any good alternatives within your plan that won t be subject to floating and resemble more of a savings-type account. 31

32 Aside from the new law, another reason to reconsider Money Market Funds is the often overlooked management fees charged by the fund. These fees eat away at the small dividends your money earns. Why pay money to just have your cash held by a Money Market Fund? 32

33 These rules are a fundamental change to the way the very popular Money Market Funds work. I hope this article was helpful. Please send any questions/comments to: Info@RockinFinance.com Copyright 2014 Rockin Finance LLC Author: Felicia Voloschin, CPA, CFP Technical Editor: Chris Staples, CFP Editor: Renee Lux Illustrator: Valerie Mears 33

34 Here are some links for farther reading: ease/ #.u92silz0bwi moodys-fitch-expect-big-impact-from-new-sec-moneymarket-rules/