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Chuck Jaffe: Your Money-Market Fund Is About To Undergo Some Changes
Here we go again. Either bad English, or bad reporting. Either way, not good for a columnist:
"Institutional and municipal money-market funds will move from the stable $1 share price to a floating net asset value. Retail funds sold to individual investors will maintain the buck as their pricing standard."
The first sentence suggests that institutional funds and muni funds (i.e. whether they are institutional or not) will have floating NAV. Wrong. It could read: institutional prime and muni MMFs, or for more clarity: institutional prime and institutional muni MMFs ...
There are two and only two attributes that matter - institutional vs. retail - US government vs. anything else (prime, i.e. corporate, or muni)
Muni MMFs are no different from prime MMFs. If they are institutional, their NAV must float. If they are retail, they can keep a fixed NAV, with fees and/or gates.
Furthermore, under the new SEC rules, retail prime and retail municipal money market funds are:
Able to continue transacting at a stable $1.00 NAV.
Available to "natural persons" investors who are not corporations or other types of organizations.
Not available to institutional investors. Institutional investors will be eligible to use government money market funds and institutional non-government money market funds, which will have a floating four-decimal NAV.
Ironically the best place to be (for several more months) might be the very place they are claiming is risk prone (Prime). Where Gov't MM's level out at is unknown at present until money flows stabilize. Prime yields are juicy at Vanguard. Switch from Prime in 1Q to Gov't if/when smoke clears. They are saying brokerages have beefed up reserves. To each his own. Eventually I will be in Gov't.
Who are "they" who are claiming prime is risk prone?
The article says that "You can be safe in a prime fund and a little safer in a government fund". Nothing about retail prime funds being especially prone to risk.
If "risk prone" means "not the absolute safest", then all the non-treasury government MMFs are also risk prone. The SEC implemented new rules to ensure that prime MMFs are not risk prone, in a more customary sense.
Geez - I've never lost a dime in a money market fund, going back 40 years.
Wish I could say the same about gold funds where I once lost a third of my investment over six months or the equity market which felt like Halloween in late summer of '07. And, Oh - also lost money with Dr. Hussman years ago. (HSGFX is still running true to form.)
My family's never lost money in a MMF either, though my father was an early adopter of Reserve Fund when it was the only game in town.
At the same time, I remain cognizant of the risks (small but nonzero), which is why I expect compensation for the risk. That's why I've suggested keeping taxable cash in 1% bank accounts until MMF yields improve.
But for brokerage- or fund-based IRAs, where moving money to and from bank accounts is problematic, I've pointed to VMMXX and FZDXX. They hit a reasonable balance between risk (small, nonzero), yield (about 0.5%), and convenience. Especially for IRAs where one likely keeps little in cash.
msf - your point is well taken. And, had not fund managers dipped into their pockets a few times to prop-up floundering money funds over the years, many of us likely would have experienced (probably minor) losses.
A benefit I see in keeping some $$ in Price's Government Money Market Fund is that it facilitates taking IRA distributions. Should there be a mistake in the way the money is taxed (or not taxed) it would seem a lot easier to straighten it out before the money has left Price's domain.
With Michigan's confusing mandatory withholding on pensions (which Price interprets to include IRA distributions) having that extra check is really nice. Of course when needed, the distributions are shifted from the money market fund to our bank account.
As for running a conservative ship with their MM funds, it's hard to beat Price. As you know, some houses in the past took liberties with these funds in search of yield - one of the reasons, I think, why the SEC saw fit to tighten regulations.
"Nothing about retail prime funds being especially prone to risk" I believe all MM's carry risk. The possibility of losing .01c means prone to risk in my mind compared to the history of MM's (for the most part) holding the buck in past years.
A quick search shows virtually every doc saying that Michigan IRAs are considered pensions for tax purposes, and are subject to withholding.
Older folk (those who were born earlier than 1953 or have spouses that old) may be able to avoid some or all of the withholding by filing form MI W-4P. I'm sure you know all this - I'm just reading up on Michigan, since I didn't know that any state required IRA withholding if the taxpayer didn't elect withholding for the IRS.
I suspect no one knows exactly how things will work, but a possibility (check with TRP): - keep enough in PRRXX (Gov. MMF, formerly Prime Reserve) to cover withholding - keep remainder in a prime fund earning a bit more interest (TSCXX)
If TRP will cooperate, then you may not have to worry about the redemption fee and/or gating on the prime fund. See if TRP will let you use the PRRXX shares for the withholding, and distribute the TSCXX shares in kind to your taxable account
You could then wait until redemption restrictions were lifted on the TSCXX shares in the taxable account and cash out.
Or you could keep everything in TSCXX, so long as redemption restrictions were not likely. This would entail monitoring the weekly liquidity of the prime fund here. No gates or redemption fees unless this drops below 30%. (It's currently 36.61%)
This would get you an extra 15 basis points - admittedly it may not be worth the effort. Maybe it would be easier to move out of Michigan
I mail TP the available Michigan "Opt-Out" form every year. Works for me. Interestingly, TRP says that without this opt-out on file, even Roths require mandatory withholding - which makes no sense at all. (A lot of things in Michigan make no sense.)
And, while we've only taken distributions from Price, some of our other fund houses insist they don't withhold any Michigan taxes on IRA distributions. I can't confirm that because we've never taken distributions from those other ones.
I realize that last point is in contradiction to the research you cited - as well as my own understanding of the law.
Some Roth distributions are federally taxable (e.g. earnings if your Roths are less than five years old). "Any portion of your Roth IRA distribution that is included in your federal adjusted gross income (AGI), is subject to Michigan tax." http://www.michigan.gov/taxes/0,4676,7-238-75545_43715-154072--,00.html
As far as other fund houses go - there are a lot of wrong answers out there. My experience with front line customer reps is that some may give answers without checking details.
Sometimes it's hard to get past front line reps. I once spent six months arguing with an electric supplier because they were charging tax to residential customers, when the city law explicitly exempted residential customers from tax. (They ultimately stopped collecting the tax but said it would take awhile to compute refunds.)
I got an answer from Fidelity earlier this year that I believed was wrong (again, a tax question). It happens. I was able to work around that answer, so it wasn't worth a fight. But I did email them a link to an IRS page directly contradicting what they told me.
Speaking of service reps, I phoned in an exchange of shares (within the same converted Roth IRA there) at Oppenheimer a couple weeks back after their online system failed to work. Much prefer doing these online and saving a screen shot.
After doing the exchange the rep began reading a lengthy script. When he got to the part that said: "This distribution is being reported to the IRS ...", I cut him off and explained that it wasn't a distribution, but rather an exchange.
Comments
"Institutional and municipal money-market funds will move from the stable $1 share price to a floating net asset value. Retail funds sold to individual investors will maintain the buck as their pricing standard."
The first sentence suggests that institutional funds and muni funds (i.e. whether they are institutional or not) will have floating NAV. Wrong. It could read: institutional prime and muni MMFs, or for more clarity: institutional prime and institutional muni MMFs ...
There are two and only two attributes that matter
- institutional vs. retail
- US government vs. anything else (prime, i.e. corporate, or muni)
Muni MMFs are no different from prime MMFs. If they are institutional, their NAV must float. If they are retail, they can keep a fixed NAV, with fees and/or gates.
Here's what Fidelity correctly writes:
The article says that "You can be safe in a prime fund and a little safer in a government fund". Nothing about retail prime funds being especially prone to risk.
If "risk prone" means "not the absolute safest", then all the non-treasury government MMFs are also risk prone. The SEC implemented new rules to ensure that prime MMFs are not risk prone, in a more customary sense.
Wish I could say the same about gold funds where I once lost a third of my investment over six months or the equity market which felt like Halloween in late summer of '07. And, Oh - also lost money with Dr. Hussman years ago. (HSGFX is still running true to form.)
Cheers.
At the same time, I remain cognizant of the risks (small but nonzero), which is why I expect compensation for the risk. That's why I've suggested keeping taxable cash in 1% bank accounts until MMF yields improve.
But for brokerage- or fund-based IRAs, where moving money to and from bank accounts is problematic, I've pointed to VMMXX and FZDXX. They hit a reasonable balance between risk (small, nonzero), yield (about 0.5%), and convenience. Especially for IRAs where one likely keeps little in cash.
A benefit I see in keeping some $$ in Price's Government Money Market Fund is that it facilitates taking IRA distributions. Should there be a mistake in the way the money is taxed (or not taxed) it would seem a lot easier to straighten it out before the money has left Price's domain.
With Michigan's confusing mandatory withholding on pensions (which Price interprets to include IRA distributions) having that extra check is really nice. Of course when needed, the distributions are shifted from the money market fund to our bank account.
As for running a conservative ship with their MM funds, it's hard to beat Price. As you know, some houses in the past took liberties with these funds in search of yield - one of the reasons, I think, why the SEC saw fit to tighten regulations.
I believe all MM's carry risk. The possibility of losing .01c means prone to risk in my mind compared to the history of MM's (for the most part) holding the buck in past years.
Older folk (those who were born earlier than 1953 or have spouses that old) may be able to avoid some or all of the withholding by filing form MI W-4P. I'm sure you know all this - I'm just reading up on Michigan, since I didn't know that any state required IRA withholding if the taxpayer didn't elect withholding for the IRS.
I suspect no one knows exactly how things will work, but a possibility (check with TRP):
- keep enough in PRRXX (Gov. MMF, formerly Prime Reserve) to cover withholding
- keep remainder in a prime fund earning a bit more interest (TSCXX)
If TRP will cooperate, then you may not have to worry about the redemption fee and/or gating on the prime fund. See if TRP will let you use the PRRXX shares for the withholding, and distribute the TSCXX shares in kind to your taxable account
You could then wait until redemption restrictions were lifted on the TSCXX shares in the taxable account and cash out.
Or you could keep everything in TSCXX, so long as redemption restrictions were not likely. This would entail monitoring the weekly liquidity of the prime fund here. No gates or redemption fees unless this drops below 30%. (It's currently 36.61%)
This would get you an extra 15 basis points - admittedly it may not be worth the effort. Maybe it would be easier to move out of Michigan
And, while we've only taken distributions from Price, some of our other fund houses insist they don't withhold any Michigan taxes on IRA distributions. I can't confirm that because we've never taken distributions from those other ones.
I realize that last point is in contradiction to the research you cited - as well as my own understanding of the law.
http://www.michigan.gov/taxes/0,4676,7-238-75545_43715-154072--,00.html
"if part of the [Roth] distribution is taxable, then Michigan pension withholding would be required on the taxable portion of the distribution."
http://www.michigan.gov/taxes/0,4676,7-238-43513_59451-263747--,00.html
As far as other fund houses go - there are a lot of wrong answers out there. My experience with front line customer reps is that some may give answers without checking details.
Sometimes it's hard to get past front line reps. I once spent six months arguing with an electric supplier because they were charging tax to residential customers, when the city law explicitly exempted residential customers from tax. (They ultimately stopped collecting the tax but said it would take awhile to compute refunds.)
I got an answer from Fidelity earlier this year that I believed was wrong (again, a tax question). It happens. I was able to work around that answer, so it wasn't worth a fight. But I did email them a link to an IRS page directly contradicting what they told me.
After doing the exchange the rep began reading a lengthy script. When he got to the part that said: "This distribution is being reported to the IRS ...", I cut him off and explained that it wasn't a distribution, but rather an exchange.
He corrected himself. But ... Geez.