New rules should make money market funds even safer, but yields may suffer even more. Morningstar's Christine Benz offers investors a few alternatives to consider.
Jason Stipp: I am Jason Stipp for Morningstar. Money market funds got a bit of a black eye in 2008 when the Reserve Primary Fund broke the buck. Its net asset value went below $1, meaning that investors actually lost some of their principal, which is not something they were used to doing in a money market fund. In response to that, the SEC has adopted a new set of rules about money market funds that went into affect last week.
Here with me to talk about the details of that is Morningstar's Christine Benz. She is director of personal finance. Thanks for joining me Christine.
Christine Benz: Jason, nice to be here.
Stipp: So this was a pretty big deal when it happened back in 2008. There was a lot written about it. Just now some rules from the SEC are going into effect. Can you outline what those rules entail; how are they trying to fix the situation?
Benz: Well, they are trying to make money market funds safer, so there are a couple of new rules. First, money market funds must keep more money on hand in investments that can be easily liquidated, and there are also new limits on how much they can hold in less liquid securities. So just 5% of assets can be parked in securities like that. And overall the credit quality restrictions, as well as maturity restrictions are getting tightened up and specified. So, I do think that money market funds--already safe before, will be even safer than what they were in the past.
Stipp: So on the face with then these investments, which are supposed to be safe, could be even safer. That's sounds like a good thing. Are there any downsides than to the rules that the SEC is adopting?
Benz: Well, yes, and the key one is yields. So investors in these funds have been pretty strapped, they've not been earning much in the way of yields. Some fund shops have gotten out of this business altogether, because once you factor in the costs of running the fund, its just not been a good business for them to be, and it's not been profitable. So I think that you'll continue to see some downward pressure on yields as some funds are required to swap into higher-quality, higher-liquidity security.
Stipp: So it's sort of that risk reward, so it may be safer, but you're just not going to get paid as much?
Benz: Exactly.
Stipp: So, given that and given that yields already are so low and now they could go even lower for some of these investments, do I have any other options then for where to park my cash?
Benz: Well, a few ideas. First of all, you don't want to hold anymore in cash than you absolutely need to at this point. So, for retired people I usually say, you want a minimum of two years worth of living expenses in true cash, and people who are working would want three to six months worth of living expenses in cash, and beyond that you can think about venturing into a high-quality short-term bond fund perhaps with a portion of the safe sleeve of your portfolio.
And then also I have been hearing from readers about some different ideas beyond money market funds. Some people have been talking about getting into say five-year CDs, which offer significantly higher yields than money market funds. And even if you do have to pay a penalty to get out of that CD prematurely that you may still be ahead with the yield that you are picking up before you need to get out of it. So that's an idea.
Credit unions are another idea, a way to pick up a higher yield. You may not be able to avail yourself of some of the bricks and mortar features that you get with regular bank accounts, but that's another idea for people who are looking for yield.
Stipp: Great. Well, thanks for the update on the funds Christine and for the ideas.
Benz: Thanks so much Jason.
Stipp: For Morningstar I am Jason Stipp. Thanks for watching.
