Can Your Money Market Fund Stop You From Withdrawing Your Money? The Answer Will Shock You!

… Anyway, let’s get started. If you got the announcement over the weekend or yesterday, the question I asked was, “can your money market funds stop you from withdrawing your money?” And this was a question, and actually it was an email, sent to us by one of our clients. He had read something online at a website that was alarming him. That mutual funds could stop people from withdrawing money from their account. And the simple answer is, “yes it’s true”. All mutual funds, all money market mutual funds can prevent or prohibit people from withdrawing money. That sounds kind of scary, doesn’t it? So let’s dig in to the fine print. And then you decide just how scary this issue is.

Money market funds are designed to always trade at a dollar a share. And up until the 2008 financial market meltdown, there had not been an instance of a money market fund dropping below a dollar. There were a couple of funds that “broke the buck” so to speak back in 2008. So some of those investors did not get back all of their money. But that brings up another interesting point. A couple of our custodians, I know definitely TD Ameritrade and I don’t think anybody was affected at Fidelity. But TD Ameritrade customers that had money in the reserve money market fund (none of our clients did) but some investors using TD Ameritrade had money in the reserve money fund. TD Ameritrade stepped in and made up the difference. They didn’t have to. They had decided that was the right thing for them to do as a company and to look after their customers. So part of it also comes back to knowing who you’re doing business with and the kind of companies that you’re doing business with.
And the other thought behind this. I believe, BT you can help me out here, the FDIC Insurance program? Is that still in place or did that get…

They had extended it. The SIPC, I think, has been raised as well but the FDIC was covering the institutions. But that was generally from a institution-failure standpoint, not a fund-failure standpoint I do believe.

OK, alrighty, good. So what were taking about there is during the… while we’re in the middle, during this market meltdown in 2008, the institutions, that being Fidelity and TD Ameritrade, money market funds there were insured at one point up to $250,000. And it was voluntary participations. The firms had to pay a, oh I’ll call it a participation fee. And I’m pretty sure that program has run its course but that just goes to show what the government and some of these stronger companies are willing to in times of economic stress which hopefully we don’t have to experience anything like what we went through back in 2008.

The bottom line is that we just wanted to get the idea across that if you across a scary headline or an article suggesting that your money can be or tied up locked up inside a money market mutual fund not to lose sleep. Not to be too overly concerned. That ruling is really designed to protect investors and their money should the fund need to or decide to liquidate. So we see no reason for significant worry or concern with regard to, or what are referred to today as money market mutual funds.

The other thing I just wanted to touch on briefly, while we are talking about money market funds, we’re getting more and more questions along these lines, “Golly, you know, a half a percent interest, a quarter of a percent of interest.” And that’s not per month, that’s per year. And just want to warn everybody that in today’s low and no interest rate environment to be very cautious , very leery about interest earning opportunities that sound too good to be true, paying above average interest rates . You really need to look under the hood. Read the fine print to make sure you don’t get into something that you regret much later. And I say much later, even 3-6 months later. In our opinion now is not the time to be locking money up inside annuities. We don’t care what kind of annuity, fixed rate, equity index, variable annuity simply because typically your money is locked up via the withdrawal penalties or the surrender charges for a period of time that’s way longer than the interest rate guarantee period on these things and with rates as low as they are to us it seems like these companies are going to have to make up whatever attractive teaser rate they’re paying today at some point down the road. So just be careful if you come across something. This is why we’re always reminding everybody. Call us, get our feedback. Get our thoughts before you take action. One of the biggest values that we bring to folks is, sometimes we refer to it as “big mistake insurance”, just get that independent third party perspective before you do something with your money to make sure you’re making smart choices with your money so you don’t have any grief down the road.

Ok, I think, with that I covered what I wanted to this morning. So, BT, why don’t we open it up and take questions.

Alright, sounds good. Well we got about 20 minutes left in the program. So for anybody who’s new. We’ll let you know how this works. I’ll un-mute the phone line and this will be a party line. So just raise your hand verbally and let us know you have a question and if there’s several of you, we definitely have some time for a bunch of questions so just take your time and be courteous. And if you have tons of noise in the background, like you have your dog barking, there’s a baby crying, you’re driving in a car and there’s lots of noise, just hit *6 and that will mute whatever’s going on your end of the line and the rest of us won’t hear that. I’m going to go ahead and un-mute the line now and please let us know if you have a question. Alright, let’s go.

Ok, so the lines are open so if you have a question just tell me your first name and ask your question.
…
Everybody’s being bashful.

Well if noone’s going to ask a question I will. My name’s Cheryl (?)

Hey Cheryl (?)

When you say that to not to tie it up in annuities, we have a couple of really old annuities with USAA and they allow us to roll over 401K. It’s in a 401K. It’s in a roll-over IRA, I should say. I have moved money from a 401K. Roll it over into that and they said we can take it out at any time without withdrawal penalties and it’s paying 4% so I’ve done that a little bit.

Mmmm. So if I heard you right, you’ve got a annuity inside and IRA. The annuity is issued by USAA. They’re paying 4%. They’re telling you there’s no withdrawal penalty even if you add money to the account.

Right, we can add as much as we want to and they pay 4%. 4.5% actually.

Oh! Based on what you’re telling me, that’s, in today’s market place, that’s a good deal.

That’s what I said.

Yeah, and USAA is.

For military

Yeah. We think very highly of them. And they do one of the better jobs out there. My comment on the annuity is typically, you know somebody today if they’re paying 4%, it wouldn’t shock me if there wasn’t a 7 or 10 year surrender charge, early withdrawal penalty period.

Oh yeah. They’re not doing that now. The guaranteed rate, I think, is like 1% or something.

Interesting. So, my guess is they’re, if the guaranteed rate is 1%, they’re paying 4-4.5% you’re going to see the rate drop in the near future …

They can’t drop it. It’s guaranteed.

For how long?

Forever.

I …

It’s in the contract . It’s a really old one and they cannot drop it below

Oh, OK, so you’ve got an old contract.

Yeah.

Alright. Well based on what you’re telling me, yeah that sounds like a good deal. Especially if you can withdraw it at any time. Uhmmmm ….

Yeah, they said there’s no penalty and because it’s well over the 7 years that we can withdraw it.

Yeah. Ok. You just want to make sure, it sounds like you have, you just want to make sure some annuity companies – if you add money, the new money starts a new penalty period…

Well I talked to 2 or 3 guys there and they all agreed that that what it was because I had a hard time believing it also.

Yeah

Well that’s a great point you make, Brian, because the new contracts, especially the ones we’ve seen within the last year, don’t carry that same set of circumstances. In fact I think we had an interesting story where someone was told the exact same thing where they could withdraw their money at any time and she went to take out money that she needed to spend within, what was it, three months Brian?

Yeah. 3 months.

And what was she told?

You have to pay a penalty because the new money in is subject to a penalty. The last money in is the first money out so this was not USAA. It was a different insurance, or a different annuity company. But so that’s where you have to be careful. The devil is in the details, as the saying goes. And hopefully you’ve got this confirmed to you in writing. And if not, I would go back to them and ask them to confirm everything to in writing.

OK

But it sounds like you got a pretty good deal.

Thank you.

Alright, next question. Anybody have a question? Just tells us your name and ask your question. Wow, another shy group this morning. Well that’s OK. We’ve gotten a number of calls and emails after the fact. We know we’ve got a number of folks listening in and folks tend to be just a little bit shy about jumping in and asking a question and that’s OK. But do us a favor. If you have questions that you think might be useful and helpful for everyone to hear and get our take on it, give us a call, send us an email with your question just like our client did with this money market question this morning and we’ll be more than happy to research your question and address it on a future call. So before we wind it up, I’ll give everybody one last chance if you want to hop in and ask a question.

Questions going once, twice… Well BT, I guess that’s it!

Sounds good.

Alrighty everybody we’re going to let you get on with the rest of your week. And we’ll see you next week our Coffee Talk call. Have a great week. Bye now.

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