Money Market Funds Face Expense Crunch

Indeed, variations in money-fund expenses can mean the difference between a tiny yield and virtually no yield at all. Some smaller money funds with high expenses have seen their operating costs eat up essentially all their earnings, leaving investors with yields in the hundredths of 1%. A number of firms are waiving some of their normal fees to keep money-fund returns from turning negative.

Even without another round of rate-cutting by the Fed, a number of multi-billion-dollar funds are scraping bottom in terms of the returns they pay investors. As of Tuesday, for instance, Reserve Primary Fund has a yield of just 0.29%. As of that same date, the average retail money fund tracked by iMoneyNet yielded 0.51% and giant low-cost funds offered by Vanguard and Fidelity Investments were yielding above 0.90%.

Given today’s tiny money-fund yields, investors should be reviewing the role these accounts play in their financial affairs. For most investors, “yield isn’t the most important reason to be in money funds. It may be a distant third to safety and liquidity,” says Peter Crane, a vice president and managing editor at iMoneyNet in Westborough, Mass. Money funds are a logical parking place for a family’s emergency reserves and any additional money that will be spent within the next year or so, many financial advisers say.