Do you feel cozy having your money in a money market fund in your 401(k), college savings plan or brokerage account?
With memories of the darkest days of the financial crisis now blotted out by five years of economic healing, you may have forgotten the panic over money market funds in 2008 and the frantic rush by the government at that time to keep people from yanking their money and running away in fear.
But the Securities and Exchange Commission recently took action involving the $2.6 trillion money market industry that reminds people once again that money market funds are a different breed than savings accounts.
While people typically think of money market funds as the equivalent of a savings account, they aren't as safe. There is no Federal Deposit Insurance Corp. protection to keep people from suffering losses when money market funds end up holding troubled securities, as the giant Reserve Primary Fund did in the financial crisis. The threat of losses spilling over to other funds prompted investors to bolt, and the U.S. Treasury and Federal Reserve took emergency action to backstop the funds.
Yet, even now, with new regulations adopted by the SEC last week, the funds probably won't be immune to a 2008-type panic if the system someday encounters a grandiose financial failure like the collapse of Lehman Brothers or AIG.
Trying to fortify money market funds has turned out to be a difficult political task. As the SEC considered regulations since the 2008 crisis, the mutual fund industry and financial companies ranging from Charles Schwab to Fidelity have resisted change, insisting that money market funds tend to be safe and that government intervention could make them less so.
The action taken by the SEC, consequently, falls far short of the regulation the nation's 12 Federal Reserve presidents say is necessary to protect investors and the nation's financial system from a panic in money market funds in the future.
The Fed presidents had urged the SEC to make a major change in how shares of money market funds are priced so that investors don't take the value of their accounts for granted.
Currently, there's a practice in money market funds of assuring investors that every dollar they invest in a fund will be worth at least a dollar when they withdraw it. If securities within the fund lose value, and the value of the money market fund actually slips a bit, fund companies step forward and make up the difference so a loss never appears or unnerves investors.
Investors like it that way, and fund companies like it because money market funds make it possible for the firms to hold on to customers as they shift money between investments. But the Fed presidents said it's time to let money market funds show their true value, so people get used to the ups and downs.
They called on the SEC to let money market values "float" — reflecting losses sometimes and gains other times. But the SEC didn't buy it. Instead, the SEC adopted a compromise that will mean individuals in money market funds feel no change: The money market funds that serve primarily individuals will continue to live by the old practices of assuring mom and pop that their fund won't do what's called "breaking the buck."
But the money market funds that are used by huge institutions like hedge funds are going to have to start letting values float.
The idea is this: Individual investors tend to be patient, letting their money sit even during tough times. And since they aren't likely to panic and bolt, the money market industry can keep pricing their funds the way they always have — doctoring values if they slip a bit.
But large institutions like hedge funds are a different matter. They tend to be quick on the draw. Their goal is to be the first to grab their millions and run so they aren't sitting with a loss when others are pulling out.
The premise is that getting large institutional investors used to floating values will keep a panic from starting at some point, and protect the government from having to step up to keep a panic from undermining the financial system.
The result: If you have your money in a money market fund, "you aren't going to see an effect" from the SEC's major change, said John Rekenthaler, vice president of Morningstar.
But there is one change that is going to apply to the money market funds that individuals use, and people should realize that the change "could give them a nasty surprise," he said.
During the rare times when values of securities in a money market fund plunge significantly, the funds are going to be able to stop investors from leaving the fund for up to 10 days. The idea is to halt movement out of the fund so the fund can shore up values without investors grabbing their money and causing values to drop further.
This could be unsettling for people who use money market funds like checking accounts to pay their bills, Rekenthaler said. Still, he said, "it's fair to think of a money market fund almost as safe as a savings account." And the changes aren't going into effect for two more years.