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March 2, 2010 Tuesday FINAL EDITION
SECTION: MONEY; Pg. 1B
LENGTH: 422 words
HEADLINE: How you can lose money in a money fund: Fees; Accounts in variable annuities, 401(k)s can have negative yields
BYLINE: John Waggoner
If you invest in a money fund, you probably think you won’t lose money.
But if your money fund is in a variable annuity, you probably lost anywhere from 1% to 3% the past 12 months — not because the funds’ investments were bad, but because of additional fees the variable annuity charges.
After fees, some money fund accounts in 401(k) plans may have lost money the past 12 months for the same reason.
Money funds keep their share prices at a constant $1, so investors keep their principal safe. But extra fees levied on the funds in variable annuity contracts and by 401(k) sponsors are pushing some funds’ returns below zero.
Short-term interest rates are so low that the average money market fund yields 0.02%, or just $2 a year on a $10,000 investment, according to iMoneyNet, which tracks the funds.
Currently, 412 money funds, or 34.5% of all taxable money funds, have yields of 0%.
Any additional fees levied by a variable annuity sponsor or a 401(k) plan would probably send the yield on the money fund option below zero.
Negative money fund yields are rampant in variable annuity subaccounts. Morningstar, the mutual fund tracker, counts 1,528 money fund subaccounts in variable annuities. All but 42 posted losses the 12 months ended January, the latest data available.
For example, SunAmerica’s Seasons Advisor III policy offers the Sun SsnAd3-SST Cash Management 3 subaccount as its money market option. The subaccount’s total expenses are 2.44%. The fund lost 1.98% the 12 months ended Jan. 31, according to Morningstar.
Whether or not your 401(k) plan’s money fund is a money loser depends on how the plan allocates its expenses, says Ryan Alfred, president of BrightScope, which tracks 401(k) plans.
Some funds, for example, simply charge participants a flat fee for their 401(k). Others levy the fee on the plan’s overall assets, which could push a low-yielding fund below zero.
No money funds have lost money since the Reserve fund let its share price fall below a dollar in September 2008, sparking a major financial crisis. Many money fund sponsors waive management fees to keep yields from going below zero.
Variable annuities are self-directed retirement accounts offered by insurance companies. Investors can move their money among different investment options, called subaccounts.
For many 401(k) investors, stable value funds, which are CD-like investments offered by insurance companies, are the better choice. They tend to yield slightly more than money funds, although, like money funds, they are not federally insured.
LOAD-DATE: March 2, 2010