The Only Smart Place to Put Your Money

Free-market advocates often argue that regulation can destroy the very markets it serves to protect. That's certainly not always the case, but with money market mutual funds, proposed regulation could indeed put these cash vehicles on the endangered list. That in turn would force you to find another safe place for your cash. As I'll explain later, though, that wouldn't be such a bad thing.

What the SEC wants
The Securities and Exchange Commission is reportedly trying to come up with rules that would prevent a repeat of the panic that threatened the funds during 2008's financial crisis, according to TheWall Street Journal. Back then, the bankruptcy of Lehman Brothers forced one money market fund to "break the buck," losing its $1-per-share fixed price. Government guarantees likely prevented a broader run on the money market fund industry.

To avoid such draconian intervention in the future, the SEC is considering several proposals. One would allow money market fund prices to float rather than staying fixed at $1 per share. Others would require keeping capital on hand to meet redemption requests while forcing customers who want to redeem their holdings to accept getting only 95% immediately, having to wait 30 days to get the remainder.

What you need
The problem is that under the SEC's proposals, no one would want to own money market funds. Already, the savings vehicle is out of favor, with most funds providing little or no yield. In fact, Charles Schwab (NYS: SCHW) and many other financial firms are having to subsidize their funds to keep yields at or above zero, waiving fees that have hit their own bottom lines.

In fact, many brokerage firms have started offering FDIC-insured bank alternatives to money market sweep accounts. TD AMERITRADE (NAS: AMTD) , for instance, offers customers a sweep option that uses FDIC-insured bank accounts from the TD Bank division of Toronto-Dominion (NYS: TD) . Schwab has its own affiliate bank, as does E*TRADE Financial (NAS: ETFC) .

Moreover, both proposals are fraught with problems. Obviously, no one would want to have to leave a portion of his or her money stuck in a money market fund for 30 days earning next to no interest. Yet floating money-fund prices would create a huge tax burden that would destroy their usefulness as a cash-management vehicle. Fund giant Fidelity today warned that if money market fund prices were allowed to float, more than half of the customers in its money funds would move some or all of their assets.

Why not get paid more?
Yet the big question, as it's been for years, is why investors put up with the lousy yields from money market mutual funds in the first place. As the WSJ article pointed out, the number of funds and amount of assets under management have both dropped precipitously in recent years.

Meanwhile, there are better alternatives. Banks affiliated with a number of companies, including American Express (NYS: AXP) , Discover Financial, and Sallie Mae, pay 0.9% on FDIC-insured savings accounts right now. That's nothing to write home about, but it's better than the 0.01% you'll find at many money market mutual funds.

Combine that with the potential systemic risk involved, and it's a no-brainer that investors should get their money out of mutual funds. Yet perhaps the most ironic thing about the situation is that the Federal Reserve's low-interest rate policy is what put money market mutual funds in this messy situation in the first place -- and until the Fed finally lets up on its easy money policy, the challenge for the funds will only get worse.

Be safe
It's apparent that money market mutual funds have taken some smart steps to limit their exposure to potential problem areas, such as European banks. But without the backing of the U.S. government and without any interest, you have no incentive whatsoever to take any risk at all with your money. As long as you can get insured bank accounts that pay far superior interest rates, take 'em -- and force the money market mutual funds to make the tough business decision they face.

Protecting your cash is just one part of putting together a smart retirement plan. You'll also want to put together a balanced set of investments that includes stocks. For that task, The Motley Fool's latest special report has some good ideas, including three stocks with strong long-term prospects. The report is free -- but don't wait: Click here and read it today.

At the time thisarticle was published Fool contributor Dan Caplinger wants you to protect your cash. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Charles Schwab and TD AMERITRADE, as well as writing a covered strangle position in American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is the best protection you can have.

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