retirement

Retirees, Avoid Sweep Accounts With Low Yields

Many big brokerage firms are pushing customers into lower-yielding accounts as higher-yielding money-market funds become a scarce option.

Don't let your broker sweep your cash yield into the basement.

Many major brokerage firms in recent years have eliminated higher-yielding money-market funds as a sweep option, pushing customers into lower-yielding bank sweep accounts. Often, the cash is routed to banks affiliated with the brokerage firm, plumping up the firm’s profits.

Brokerage firm Edward Jones eliminated its money-fund sweep option for new brokerage customers in February. Merrill Lynch removed money-fund sweep options for most new accounts last September, and most existing money-fund balances have been moved to deposit accounts at Bank of America, Merrill’s parent-company bank. Charles Schwab eliminated money-market funds as a brokerage sweep option for most new accounts in 2016.

Such moves can seriously crimp customers’ yields. The 100 largest taxable money funds yield 2.25% on average, according to Crane Data, while the average brokerage sweep account now yields just 0.25% for balances up to $100,000. Schwab’s sweep options currently yield 0.33% for balances below $1 million, while the yield on Merrill’s bank sweep ranges from 0.14% to 0.75%, depending on the level of account assets.

The firms say they’re still offering competitive cash options. “Our approach allows clients to choose from among an attractive set of cash-management options while Schwab earns returns on the net interest income,” says Schwab spokesman Mike Peterson. “Those returns are then reinvested in serving clients and returning value to the firm’s stockholders.”

Brokerage firms are trying to squeeze more profits out of customers’ cash as their earnings from trading commissions have taken a hit. An industry price war has driven commissions down to just a few dollars—or even zero, in some cases. By flocking to brokerage firms offering low-cost trades, consumers “have voted with their dollars, and they want $4.95 trades instead of reasonable-paying cash,” says Peter Crane, president of Crane Data, which tracks money funds and other cash vehicles. “It’s like consumers in effect want fees they can’t see.”

Hunt for High Yields

For retirees holding significant amounts of cash, of course, maximizing cash yields may well be a top priority. If your only sweep options are low-yielding bank accounts, you can always move that cash into a money-market mutual fund.

The top-yielding money funds available to individual investors now yield north of 2.5%. Investors looking for the safest cash options may want to stick with money funds holding Treasuries and other government securities. Top government money funds yield roughly 0.2 percentage point less than top “prime” money funds, which hold corporate debt.

A few firms have retained money-market funds as sweep options. At Vanguard, for example, the only sweep option is the Vanguard Federal Money Market Fund (symbol VMFXX), a government money fund that yields about 2.3%.

Another option: Shift your cash to a high-yield bank account. Goldman Sachs’s online bank Marcus, for example, offers a 2.25% yield. Pay attention to fees and other fine print. High-yield savings accounts may require a minimum balance to avoid fees or earn the best yield. If you want some help chasing the highest yields, MaxMyInterest will spread your money among various online savings accounts and regularly reallocate the cash to capture the highest rates, for a fee of 0.08% annually.

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