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Your money market fund has changed

Updates will protect small investors from funds "breaking the buck."

Your money market fund — the cash equivalent in your investment accounts — won't be the same.

That's because the Securities and Exchange Commission's long-awaited money market reform took effect Friday.

The rules are intended to protect smaller shareholders from investors who make large cash withdrawals amid times of high volatility. While retail investors often thought of money market funds as equivalent to cash in a checking account, that really wasn't the case as the financial crisis made clear.

The changes affect any account with a money market fund, including 401(k)s, IRAs and your brokerage accounts. Here's what you need to know:

What led to the changes?

Investors once considered these funds to be a reliable place to keep cash. Prior to the 2008 financial crisis, their net asset value generally remained at $1 per share.

All of that changed in September 2008, when Lehman Brothers filed for bankruptcy. The Reserve Primary Fund, a large money market fund, held Lehman bonds.

In turn, institutional investors pulled billions of dollars from the fund, knocking its share price from the supposedly steady $1 to 97 cents on Sept. 16, 2008. It had "broken the buck."

That crisis spurred new rules from the SEC, aimed at protecting smaller investors from large redemptions.

Two key reforms came about: One would require so-called prime institutional money market funds (generally used by large investors) to have a floating net asset value rather than a fixed $1 share price.

The other creates liquidity fees and "redemption gates," which are temporary halts on withdrawals to certain money market funds.

What will I see in my IRA and brokerage accounts?

For the most part, you won't see too many dramatic changes.

If you have an IRA or brokerage account, the retail prime and municipal money market funds you're using will maintain their share price of $1.

U.S. government money market funds that are available to institutional and retail investors also will be allowed to retain their fixed $1 per share price.

Your provider, however, may change your money market settlement fund, the pool of assets you use to pay for stock and mutual fund purchases in your account.

Vanguard, for instance, said earlier this year it would use only its federal money market fund for settling trades in retail accounts. Previously, it used a prime fund.

However, the new liquidity fees and redemption gates will apply to nongovernment money market funds.

These restrictions take effect in times of market stress and when liquidity levels in the fund fall below a certain amount. They are supposed to keep the funds from "breaking the buck" again.

Liquidity fees can be as much as 2 percent, and fund companies can hold up withdrawal requests for up to 10 business days. This reduces the risk of a run on the fund.

How about my 401(k)?

Your employer may have taken steps to change the money market fund available to you, likely switching from prime or municipal funds to a U.S. government fund.

You might also see your employer add or substitute in a stable value fund, which is a blend of insurance and bonds. The insurance protects your principal and gives you a minimum guaranteed rate of interest.

Sixty-five percent of U.S. retirement plans offer a stable value fund, according to Callan Associates, an investment manager.

What else do I need to know?

The changes shouldn't lead to an overhaul of your investment mix, but now might be a good time to get familiar with your holdings in your 401(k) and IRA.

Consider how much cash you currently hold on hand and ask yourself whether it's time to evaluate your choices.

"Any excuse to pay attention to your portfolio is valid," said Benjamin Brandt, a fee-only financial planner at Capital City Wealth Management in Bismarck, North Dakota. "Should you be in cash? What about a short- or intermediate-term bond fund?"

"Dig into those statements and ask yourself why you own those positions," he said.