This article originally appeared at Forbes by Robert Schmansky, CFP®.
Interest rates may be inching upwards, but it may be some time before your money market account does.
While popular wisdom is that rates can only increase, many money market funds have been operating at losses. According to iMoneyNet, the average US taxable money fund yield is 0.10%, though a quick scan of most major brokerage firms shows many funds are still paying just above zero.
Rising rates should lift all boats. However, most funds have been supplemented by operating expense waivers that have kept investors from experiencing negative returns. While the Investment Company Institute’s 2016 Investment Company Fact Book has the average operating expense of a money fund at 0.11%, brokerage clients often pay significantly more. A quick scan of Schwab’s money fund expenses shows many retail funds between 0.45-0.67%; these funds had yields of 0.01-0.15% as of March 4th, 2016.
In addition to funds needing to overcome operating expenses, the expense waivers may also be subject to a recapture of past fees. According to TIAA’s website, the CREF Money Market Account anticipates ending a fee waiver before next April, and once the fee waiver ends the fund “may recover from the account a portion of the amounts waived.”
TIAA also notes that “it is anticipated that after the waiver ends, unless interest rates rise sufficiently, one or more classes of the CREF Money Market Account may have negative yields.”
While many 401(k), 403(b) and other investors may have limited short-term savings options, investors in brokerage money market accounts may look to see if your provider has an optional FDIC-insured account in lieu of a high-cost money fund.