Ever since a big money market fund "broke the buck" during the financial crisis in 2008, financial reformers have been calling for an end to such funds' claims that $1 invested is always worth the same amount.
But after five years of study and debate, and numerous proposals to force the end of the "buck" guarantee, the Securities and Exchange Commission is now backing a plan to let leading fund companies keep the guarantee in place for retail fund holders. Some regulators were pushing for a requirement that funds abandon their guarantee that a dollar kept in a money market fund would always return a dollar when savers cashed out, and instead do what other mutual funds do: redeem funds at whatever the net asset value is for the fund holdings that day.
Still, the proposals, if approved, could mean big changes for widely held money market funds, and the timing could be difficult. The changes would likely be put into effect next year just as the Federal Reserve is expected to start boosting interest rates, and even short-term bonds (the sort favored by such funds) could lose value. For many investors, money market funds are considered safe havens in such periods.
So what would the proposed changes mean for average investors?
The "buck" guarantee will remain in place if you are in a retail fund. (The SEC defines this as funds that limit daily withdrawals to $1 million.) Unless your fund is hit with unusually heavy withdrawals, every dollar you invest will be redeemed when you want to get out.
For retail funds that do get into trouble – and that's only happened a couple of times in the history of the funds – there are new provisions aimed at slowing down a potential run on the fund. In certain situations, the fund, for both retail and institutional holders, will be required to charge money market holders a fee of 2 percent if they want to get out.
For larger institutional funds, the SEC proposes ending the "buck" guarantee and requiring them to move to floating rates over the next two years. That would mark a major change for the fund industry. The impact would be widespread, and promises to reshape the $2.5 trillion market in ways that may be difficult to forecast.
For starters, institutions that invest in the funds – pension funds, company treasuries and other large cash holders – would have to work harder at assessing risks for funds that will rise and fall with interest-rate fluctuations. The dollar they invest could be worth a few cents less when they withdraw money. It sounds inconsequential, but given the billions stashed in those accounts, those pennies can have a major impact. For starters, tax questions will become far more complex. Investors will have less certainty about funds at their disposal and higher costs for doing business as accounting and trading the funds becomes more time-consuming and volatile in a floating-rate world.
Retail investors will largely be spared the mess since they would still be "buck" holders. But even small investors would feel the impact if more fund companies get squeezed out in a low interest-rate environment, critics of such changes say. The largest money market funds will probably get larger. That could mean fewer options for investors. This has been a key issue raised by Investment Company Institute, the powerful trade group that represents the funds in Washington. It warned in a statement after the new rules were proposed that "changes must preserve choice for investors by ensuring a continued robust and competitive global money market fund industry." It supported the provisions aimed at heavy withdrawals but took no position on the floating-rate issue, which has divided its membership.
[Read: Are There Too Many Mutual Funds?.]
New rules could also cause a further decline in the share of Americans' savings put into money market funds. The $2.5 trillion parked in these funds has stayed at close to the same level for the past decade, while bank deposits have grown. Bank deposits now total $14 trillion, according to Federal Deposit Insurance Corp. data. A decade ago, the total was $8 trillion. Money market funds held about one-quarter of the amount banks held 10 years ago. That's slipped to 17 percent now.