Vanguard Closes Door to ‘Safest’ Investments

The Vanguard Group closed its Treasury money market funds to new investments.

In a letter to participants in 401(k) plans it administers, Vanguard blamed the low yields offered by Treasuries for the closure, stating that its Treasury Money Market Fund would accept no new contributions beginning February 27, according to Forbes. Past contributions are allowed to remain in the Treasury fund; however, investors who do not choose a new investment for their contributions will have new money defaulted to the Vanguard Prime Money Market fund.

The financial crisis has dropped the yield on the T-bills the fund owns to close to zero. According to Forbes, in February, the fund returned only 0.02% net of expenses—far below the 0.28% expense ratio it charges. Forbes also said Fidelity Investments and Charles Schwab Corp. have made similar moves in recent weeks.

The $40 million pension fund for the Orange County Sheriff’s Office in Orlando, Florida, invested in the Vanguard Treasury Money Market fund because it was considered risk-free, the news report said. The fund is not happy about having its assets redirected to a new investment.

In the letter sent to 401(k) participants, Vanguard said: “Vanguard Prime Money Market Fund has an identical investment objective to Vanguard Treasury Money Market Fund: It seeks to provide current income while maintaining liquidity and a stable share price of $1. However, Vanguard Prime Money Market Fund has a higher seven-day yield.” However, Edward Siedle, president of Benchmark Financial Services and a consultant to the Orange County Sheriff’s plan, argues that an identical investment objective does not mean the funds are equally safe.

The Vanguard Prime Money Market fund has 37% of its assets in certificates of deposit and 12% in commercial paper, and about half of the fund is invested in U.S. government debt. Siedle said the portion of the fund that is not in government debt is subject to substantially greater risk, according to the news report.

A spokesman for Vanguard said the letter to investors made clear that the funds invest in different securities.