Protecting your Money Market Funds

As a result of the bill passed on Friday, note that FDIC insurance has now been raised to $250,000 per account. We will revise this posting, which was written prior to the drafting of the bill, once we have thoroughly reviewed the new provisions.

After last week’s announcement of money market giant, Primary Fund (RFIXX), freezing assets due to Lehman holdings and hearing that Ferris, Baker Watts temporarily froze a friend's money market, I thought I’d offer some tips on how to protect the cash you may be holding in your accounts. For more complete information, refer to this Wall Street Journal article, the source of this information. Full Article

First, consider that the FDIC insures bank deposits up to $100,000 per person per bank. So, if you have less than that in your bank account, there’s no need to worry even if the bank fails. However, most high net worth clients of mine have substantially more cash, either because we’re choosing to be conservative in this market or because their cash flow needs warrant holding more than $100,000. In these cases, there are several courses of action:

Buy CDs through a brokerage account: Through Fidelity, we have access to CDs from institutions across the US, including Puerto Rico. Purchasing multiple CDs with multiple institutions all at levels below the $100,000 is a safe and expedient way to consolidate your cash in one account yet receive full insurance protection (i.e. in one brokerage account you could be insured for $300,000 as long as you had 3 different CDs from 3 different banks.)
Joint Accounts: Insurance coverage is for each account holder, so holding cash in a joint account provides $200,000 of insurance
POD Acccount: This account titling is accomplished by adding beneficiaries to your account. The result is an additional $100,000 of coverage for each beneficiary. However, this needs to be considered carefully in conjunction with your will and estate plans as it can circumvent intended bequeaths.
Retirement Accounts: In addition to the benefits of tax deferred growth, another great reason to maximize contributions to your qualified retirement accounts is the additional insurance coverage afforded to such accounts. Traditional IRAs, ROTH IRAs, and Rollover IRAs are insured up to $250,000.
Revocable Living Trusts: While an attorney is required to draft trust documents for these trusts, there are special FDIC regulations affording such accounts more protection.

Begin by checking to see if your total cash balance per account falls below the FDIC insurance levels. If not, take action to reduce balances in these regular accounts to the $100,000 limit, or employ some of the above techniques to increase insurance protection provided in your account. Secondly, check the status on money markets used in your brokerage firm accounts. If there is any reason for concern, either move funds from that money market to Treasuries (I use Vanguard’s Short-Term Bond ETF symbol BSV) or withdraw the funds altogether.

Feel free to email me if you have any concerns or want further information on how to protect yourself. These turbulent times in our nation’s banking system are not over yet.