It is tough to figure out what will happen with the market in this volatile period. Last week, the Dow Jones Industrial Average and the S&P 500 were sinking lower and lower only to rebound this week with 4 straight days of gains. In such times, many plan participants have been forgoing placing their money in the tumultuous equity market and instead place their money in the conservative and “steady” money market funds. Recently, however, even the money market funds are not immune to financial losses for plan participants as money market funds are treading closer to the negative, and some are already there. How can this be?
According to Christopher Condon of Bloomberg.com, money market funds that focus on the U.S. Treasuries are susceptible since the yields are so low and cannot cover plan expenses. As of December 10th, 2008, “of the 500 largest U.S. money-market funds, 41 have daily annualized yields at or less than 0.05%, including four funds with zero yield”.
To further exemplify their point, the category average of taxable money market funds according to Morningstar.com is:
|
Taxable Money Market
|
1 month
|
3 month
|
YTD
|
|
Return %
|
0.05
|
0.22
|
0.05
|
*as of 2/28/08
If plan participants are wondering why their money market account is losing money, explain to them that the combination of low yields and plan expenses could result in negative returns. Also, this might be a stark reminder that no matter how safe an investment is, participants must also be educated and do research. As this troubling time tells us, there are no completely safe investments.
For more information, please read:
Christopher Condon’s article: http://www.bloomberg.com/apps/news?pid=20601087&sid=axHG.5Dvl3P4&refer=home
Or read Laura Bruce’s article:
#1 by Read and Write Reviews on December 12th, 2010
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#2 by Julia Franzen on February 4th, 2011
It’s true that the Fed has been trying to keep yields especially low to spur growth and avoid deflation, which theoretically should put more money into the capital markets and out of the sidelines (sidelines here refers to keeping money in cash or such low-risk tools as T-Bills and money market funds). In fact, at the height of the crisis the yields on T-Bills were actually negative. That being said, it’s now 2011 and the Fed cannot keep its rates as low as it wants due to pressure from bullish investors and a more optimistic market. I think we’re going to see only growth from here on out, making the money market funds as safe and solid as they ever were.
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