Beware: New fees could eat into your money market fund

Here’s something else to thank the financial crisis for: Starting Oct. 14, new rules go into effect that allow some money market mutual funds to charge shareholders fees of up to 2 percent on withdrawals. 

It’s not that money market fund managers are greedy. It’s the result of the heavy withdrawals from shareholders who needed large amounts of cash immediately as the financial crisis spiraled out of control. Those rapid withdrawals amid falling asset values led several money market funds to lose money, meaning they “broke the buck,” sending new shock waves through the markets. 

In response, the Securities Exchange Commission (SEC) -- the principal regulator of money market funds -- adopted new rules that allowed funds to apply special fees and restrictions to discourage heavy redemptions during times of financial stress.

Here’s what you need to know to keep these new fees from eating up your cash.

As of Friday, money market funds will be allowed to charge shareholders fees of up to 2 percent if the weekly average liquid assets in the fund falls below 30 percent of total assets. This is aimed at slowing down withdrawals and bolstering the funds’ liquidity by keeping the redemption fee money. Fund boards have the discretion to charge the 2 percent fees, but must charge 1 percent when liquid assets fall below 10 percent.

Funds may also suspend shareholder redemptions for up to 10 days if liquid assets fall below 30 percent. Redemption requests during that time are rejected, rather than held and processed after the “redemption gate” is lifted. That means you would need to watch the fund carefully and request a withdrawal only after the gate is suspended.

These rules also apply to “prime,” or institutional, money market funds. While they pay higher interest rates -- 0.25 percentage points to 0.5 percentage points more -- they have higher risks (along with higher minimum investments of $500,000 or more).    

Government money market funds, which hold only U.S. Treasurys and other government agency securities, aren’t subject to the new rules. That’s because they’re deemed to be low-risk and are extremely liquid, even in times of severe market stress. Investors should look for words such as “Treasury-Only,” “Treasury,” or “Government” in fund names to determine if they’re exempt. To be sure, call the fund’s shareholder service line or ask your broker.

Given that these rules don’t apply to government funds, individuals who don’t have the money required for prime funds should avoid retail and institutional municipal money market funds (which are tax-exempt). If that’s where your money is now, you should move it into a government fund.

However, investors with cash in a money market account offered by a bank, can rest easy. These money market accounts, or MMAs, are exempt from the new fees. 

That’s because they aren’t mutual funds, but rather cash accounts where deposits are highly liquid, held by the bank and insured by the Federal Deposit Insurance Corp. But whether your bank will be liquid during times of market stress and heavy redemptions is another concern altogether.