by Janet Romano / Published June 2014
Many community associations have money market accounts at their banks and utilize them to earn competitive interest rates on reserve funds and, in some cases, excess operating funds. Associations that collect maintenance fees quarterly or less frequently keep most of their funds in an operating fund money market account to earn interest, and keep only enough money in their checking accounts to cover one month of operating expenses. However, many managers are not aware of how bank money market accounts work, the history of these accounts, and the rules the customer and bank must live by.
The first thing that a manager needs to understand is the difference between a bank money market account and a brokerage money market fund. Almost all of the stock brokerage firms offer money market funds, some of the options offered by brokerage houses are: U.S. Treasury backed money market funds, U.S. Government and agency backed money market funds, municipal money market funds, local municipal money market funds, and socially responsible money funds. These money market funds are not FDIC insured. They are covered by SIPC–Securities Investor Protection Corpora-tion, which is private investor insurance and offers no insurance on loss of principal. If the association chooses a fund backed by U.S. Treasuries or U.S. Government agency bonds, there is little risk in-volved. However, many brokerage houses do charge fees to participate in these programs.
Bank money market accounts are Federal Reserve Bank insured and offer two important features sought after by community associations—safety and liquidity. Unlike timed deposits, such as Certificates of Deposit (CDs), money market accounts offer liquidity; the association can withdraw money from the account without penalty.
Banks must follow FDIC’s Regulation D, which covers the number of withdrawals a depositor may make in one month. Preauthorized transfers are limited to six per month, and examples of these transfers are checks, drafts, debit card use, transfers from the money market account to cover overdrafts in checking, and if a preauthorized agreement is in place, telephone transfers and online transfers.
Exempt from these six- transfers-per-month rule are preauthorized debits for loan payments for a loan made to the bank holding the money market account, in person withdrawals, transfers to another account within the same bank made in person, by mail, or using the ATM machine.
The bank is required by the Federal Reserve Bank to monitor withdrawals on money market accounts, and withdrawals in excess of the six allowable, and if this happens on a consistent basis, the bank may change the account type to checking, close the account, stop paying interest on the account, or remove the account’s transfer and draft capabilities.
Money market accounts pay higher interest rates than checking accounts, but usually pay lower rates than certificates of deposits. Many banks offer tiered money market accounts so that the higher the account balance, the higher the interest rate paid on the account. Some banks pay compound interest and some pay simple interest on commercial money market accounts. Your association accounts are commercial accounts. With compound interest, more interest is earned on the account. Managers and board members should inquire about whether interest is compound or simple when the account is opened. You should also know that the bank can change interest rates on money market accounts with notification to reflect market conditions.
Some banks offer money market account specials, which offer higher than average rates for a limited time, or when the association also opens a checking account. When opening a money market account that is a “special,” it is important to know what the rate will be after the promotional period, and whether there will be any fees involved in closing the account after the promotional period has ended.
Associations utilize money market accounts in banks for the convenience of having funds liquid and available when needed, to earn higher interest than they can earn in checking accounts, and for the ease of transferring between the money market and checking accounts. As long as the association pays attention to the FDIC coverage limit of $250,000 per commercial depositor in any financial institution, they are a safe investment for association funds.