I have begun receiving communication from a third party administrator (TIAA-CREF) concerning changes to how money markets are designated. According to TIAA-CREF, "These changes, which were put into effect on October 14, 2016, required all money market funds to be designated as “retail,” “institutional,” or “government” type funds, each of which have different restrictions in terms of liquidity, fees and/or investor profiles." I decided to reallocate a third of my money market based on the tone of the communication received from the company because I have nothing else to base it on. I understand there are risk but at 7.7 years away from full retirement I'm not sure how to think about this or what to do.

Terry Says:

OK, I probably should have written a column about this — but it is a pretty esoteric subject.  And it likely won’t have any impact unless there is a true financial crisis, in which case there are a lot more things to worry about!

Basically, if you remember the 2007-08 crisis, there were a lot of withdrawals from money market funds that held commercial paper (corporate short-term IOUs).  In fact, some funds worried that to sell the paper and have the liquidity to pay fund shareholders on demand, they would have to sell the paper at a loss — and then the share price would have been less than the $1.00 price that guarantees full liquidity and no losses in MM funds.  It’s called “breaking the buck.”

I have always recommended “government-only” money market funds.  Because these funds buy U.S government overnight paper (IOUs) and they can by law never be worth less than face value on an overnight basis, this problem of breaking the buck should not occur.  (Longer term government notes and bonds can trade at market prices that are lower than face value when interest rates rise.  )    Government money funds yield slightly less than money funds that buy short-term commercial paper, but I have always wanted complete security for my “chicken money.”  Even if it means earning just about “no” yield!

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