Is your money market fund too expensive? Why high fees may (or may not) be worth it.

USA Today

13-05-2025

Is your money market fund too expensive? Why high fees may (or may not) be worth it.
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What is a stock and how does it work?
Buying stock can be a smart way to invest and, hopefully, make more money over time.
If you're parking cash in a money market fund while waiting for recent market volatility to subside, you might be paying dearly for that safe spot.
Many money market funds still carry high expense ratios, which are management fees expressed in a percentage. The average money market fund fee is 0.38%, which is sharply higher than the 0.05% average fee on an index equity mutual fund, according to the Investment Company Institute (ICI). That means, on average, you'll pay $38 annually for every $10,000 you have invested in a money market fund compared to $5 for the index equity mutual fund.
Investors should be aware of this, so they don't fall into the trap of overpaying to hold cash.
What is a money market fund?
A money market fund is a type of mutual fund that invests in short-term, high-quality debt securities such as T-bills and certificates of deposit. Money market funds aim for high liquidity and stability.
How can investors find lower fees?
Look beyond your broker. 'Brokerage firms often limit investors to selecting from a menu of money market funds managed by the brokerage firm,' said Michael Brenner of FBB Capital Partners. 'If your broker offers you access to third-party money market funds, those may come with lower fees.'
Try an exchange-traded-fund (ETF). 'Consider using a low-cost ETF which has underlying investments that are very similar to your money market fund,' Brenner said. 'Those ETFs may carry much lower fees than a similar money market fund. Bond Index ETFs have fees that average around 0.10%.'
Are lower money market fund fees the answer?
While looking for a cheaper money market fund isn't a bad idea, some money managers say people should only be using money market funds short-term, anyway, unless they're elderly and worried about loss.
'The big rip off is if you're using them for anything more than short-term because you're not growing your money,' said Ronnie Gilliken, president and chief executive of Capital Choice of the Carolinas. Money market fund rates aren't typically enough to fulfill the "Rule of 72" over a short timeframe, he said.
The Rule of 72 is used to estimate how long it will take to double your money. Divide 72 by the interest rate (as a percentage) to get an approximate number of years it will take to double your money. The average yield for money market funds is currently around 4.14% based on data from the ICI Fact Book for 2025.
What about fees in general?
But while money market fees should be noted, investors should resist the urge to solely use fees to decide whether to invest in something or not, Gilliken said.
Instead, people should focus on net returns, he said. Otherwise, people could end up eliminating outperforming funds from the outset.
Take for example, a $10,000 investment in 1976, when Vanguard launched its first low-cost Vanguard 500 Index Fund. The Fund had an expense ratio of 0.14% when it was launched and has dropped now to 0.04%. That investment would have netted you $1,704,343 if you'd maintained it through 2023.
Compare that to the $2,455,295 you would have earned had the money been invested in the five U.S. equity-focused American Funds available at the time, American Funds said. Since that's a net return, it includes the deduction of the maximum sales charge of 5.75% for equity funds, according to American Funds.
The difference is that before buying stock of a company, analysts from the mutual fund company will visit the company, meet the chief executive and the board, get the company's financials, tour a factory or production areas, do data analysis versus the competition and if it's in a foreign country, assess political risk and legislation, Gilliken said.
'That's all included in the expense ratio,' he said. 'An index is just a thermometer of what is going on' but doesn't look at each individual company. 'Just because the company's big and in the index doesn't necessarily mean you should own it.'
Sometimes, some experts say, a slightly higher expense ratio can be worth it. Energy company Enron was in the S&P 500 but went bankrupt in the early 2000s after widespread accounting fraud, misrepresenting its financial performance and hiding billions of dollars in debt, was discovered, he noted.
Research, including from the famed Wharton business school, has shown 'active' investment managers often aren't able to pick enough winners to justify their high fees.
However, if you can find one who can, sometimes, 'we deserve our compensation,' Gilliken said.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [e-mail] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.