Companies and retirement funds, much like regular folks, have long treated money market funds like savings accounts, using them to stash cash.
But an impending October rule change by the Securities and Exchange Commission — a reform that stems from the 2008 financial crisis — is spurring a mass exodus from some of these funds.
Since October 2015, prime institutional money market funds have lost $392 billion, according to Fitch Ratings. These funds are primarily used by corporations to keep their cash.
Just in the four weeks between July 5 and August 9, the funds have lost $54 billion.
The new SEC rules aim to make money market funds more secure. In 2008, investors panicked and yanked almost $250 billion from the industry across 10 days after a fund holding Lehman Brothers debt collapsed.
It came as a shock, since money market funds are considered one of the the safest places to park your money, and users are usually guaranteed to be paid back. The federal government had to step in to insure investments.
Now, these funds have to update their playbooks. They will be required to eliminate guarantees, meaning they can’t promise investors will have all money returned.
That’s a problem. The lure of these funds is that they can act as a savings deposit account. And they pay very little by way of interest rate returns.
The people who run the prime money market funds have usually made money by investing the cash in short-term debt issued by highly rated corporations such as banks. But they are the ones that will be hit with the changes.
Other money market funds that invest the cash in U.S. federal government debt are exempt from the new provisions. No wonder these funds are growing exponentially — just in the past month, they gained $88 billion.
One of the biggest concerns about the new rules is that customers can see see withdrawals frozen entirely during a crisis or even incur fees, an outcome few users would like.
“Many investors don’t like these new features,” said Greg Fayvilevich, senior director of funds and asset management at Fitch.
That’s encouraging prime funds to convert into government debt-only funds. Even the biggest players are moving fast. Fidelity Investments, the top provider of 401(k) retirement plans in the country, converted its biggest money fund, with $115 billion in assets, from a prime fund to a government fund late last year.
Regular investors should take a look at brokerage or retirement accounts and figure out where the money is kept, Fayvilevich said. If it’s in a prime fund, it’s something to watch out for.
“See where your cash is actually stored,” Fayvilevich said. “If you’re not comfortable with it, you have other options.”
