Is Your Money Market Safe?

Oct. 7, 2008 — -- Investors worried about the safety of their cash held in money market mutual funds may want to check up on them later this week.

What they will want to know is whether their money market fund is participating in a U.S. Treasury Department program to guarantee the $1 share price of these funds.

Under details announced last week, mutual fund companies have until Wednesday to sign up for the program meant to protect shareholders against money market funds that "break the buck." Individual investors will not be able to sign up for the program themselves.

U.S. Treasury Secretary Henry Paulson first announced the program Sept. 19 to prevent a run on money market funds after the news that the share price of funds operated by the Reserve Fund -- the pioneer of the money market mutual fund -- had fallen below the sacred $1 price. The Treasury Department waited 10 days to announce the guarantee program's details.

The rules established by the Treasury Department leave it up to fund companies to decide whether to participate. Participating funds will be required to pay an upfront fee. As a result, some fund companies may decide not to participate.

The Financial Industry Regulatory Authority late last week advised investors to contact their fund directly or check its Web site to see if it will participate in the guarantee program.

Unlike other mutual funds, money market funds seek to maintain a level share price -- or net asset value -- of $1, assuring investors they receive back one dollar for every dollar invested, plus any interest or dividends.

Though long considered a safe place to park cash, money market funds are not protected by Federal Deposit Insurance Corp. insurance the same was as are bank deposits. Until The Reserve Fund problem, just one money market fund had seen its net asset value -- or NAV -- fall below $1 in nearly 40 years.

The Reserve Fund ran into trouble when its bonds issued by the failed Lehman Brothers turned worthless. Treasury Department officials worried investors would begin to flee other money market funds, adding to the nation's current financial crisis.

The guarantee program is scheduled to be in place for three months initially, running from Sept. 19 until Dec. 19. The Treasury secretary will have the option to renew the program for up to an additional nine months.

One additional key point to know is that for participating money market funds, investors will be protected on the number of shares they owned as of Sept. 19. Additional shares purchased since then will not be covered.

To make sure those pre-Sept. 19 shares are protected, assume nothing. Instead, check with your fund company to find out how your cash is protected.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com.