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The End of Money-Market Funds?

Jonnelle Marte

Regulators are finishing a plan to make money market funds safer, but critics say the proposal could ruin their appeal for many savers.

The Securities and Exchange Commission reportedly plans to unveil a two-part plan to stabilize money funds, which are short-term investment vehicles used by individual investors and institutions to park cash. According to a report in the Wall Street Journal, the SEC’s goal is to limit losses for shareholders during times of financial stress, such as in 2008 when one fund “broke the buck,” or fell below the steady $1-per-share asset value that investors have come to expect. Investors have also worried about money-market funds’ exposure to the European debt crisis; the current proposal would require fund firms to set aside more capital to boost liquidity, and perhaps put restrictions on how quickly investors can access their money.

But while the measures may shore up the money-fund market, critics say they could also lead to fewer options and higher fees for investors. In recent years, firms have been waiving fees in an effort to keep yields above zero for investors and they’ve just barely been successful: the average yield on a taxable money market fund is .02% according to iMoneyNet, a money market researcher. Many fund providers have been forced to cut back their offerings or get out of the business completely. The number of funds dropped by more than  20% to 631  in 2011 from 805 in 2007, according to the latest data available from the Investment Company Institute. The new requirements could force “more providers to exit the money fund business,” Greg McBride, senior financial analyst for Bankrate.com.

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The proposal comes as investors, less spooked by the stock market and searching for better yields elsewhere, have been bailing from the funds. Assets in money market funds have dropped to $2.7 trillion now from a peak of $3.9 trillion in 2009, according to the Investment Company Institute.

To be sure, the proposal still needs to be voted on and could change before it is approved, with at least three of the five commissioners needed to approve the proposals before submitting them for public comment. An SEC spokesman said in a statement that SEC Chairman Mary L. Schapiro ”is advocating structural reforms to money market funds to address their susceptibility to runs and provide a buffer against losses.  The staff is actively preparing a reform proposal for Commission consideration.”

Still, advisers recommend that investors looking for better yields should turn to high-yield savings accounts. The average yield on savings accounts is close to 0.4%, but some banks offer up to 0.9%, according to Bankrate.com. However, savers will have to wait a few days for transfers to clear before they can invest the money in stocks or other asset classes, says McBride. Another option, says Cargile: Short-term bond funds, many of which yield more than 1%. Experts say investors should keep in mind that short-term bonds can drop in value when interest rates rise, though they should fall less than longer-term bonds.

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