What Is a Sweep Account?
A sweep account is a bank account that automatically transfers amounts that exceed, or fall short of, a certain level into a higher interest-earning investment option at the close of each business day. Commonly, the excess cash is swept into money market funds.
- A sweep account automatically transfers cash funds into a safe but higher interest-earning investment option at the close of each business day, e.g. into a money market fund.
- Sweep accounts try to minimize idle cash drag by capitalizing on the immediate availability of high-interest accounts.
- A sweep account service may not always be free. You might have to pay fees to your broker that might make the sweep not as attractive on a net basis.
How a Sweep Account Works
Using a sweep vehicle like a sweep fund works by providing the customer with the greatest amount of interest with the minimum amount of personal intervention by transferring money at the end of the day into a high-interest account. In a sweep program, a bank's computers analyze customer use of checkable deposits and sweep funds into money market deposit accounts.
As of 2016, some brokerage accounts had similar features that enabled investors to gain some additional return for unused cash. Sweep accounts are simple mechanisms that allow any money above or below a set threshold in a checking account to be swept into a better investment vehicle. Sweep accounts were needed historically because federal banking regulations prohibited interest on checking accounts.
Sweep accounts were originally devised to get around a government regulation that limited banks from offering interest on commercial checking accounts.
Sweep accounts, whether for business or personal use, provide a way to ensure money is not sitting idly in a low-interest account when it could be earning higher interest rates in better liquid cash investment vehicles. These investment vehicles that provide higher interest rates while still offering liquidity include money market mutual funds, high-interest investment or savings accounts, and even short-term certificates with 30-, 60- or 90-day maturities for known layovers in investments.
Businesses and individuals need to keep an eye on the costs of sweep accounts, as the benefit from higher returns from investment vehicles outside the checking account can be offset by the fees charged for the account. Many brokerages or banking institutions charge flat fees, while others charge a percentage of the yield.
Special Considerations: Personal Sweeps vs. Business Sweeps
Sweep accounts for individual investors are typically used by brokerages to park money waiting to be reinvested such as dividends, incoming cash deposits, and money from sell orders. These funds are typically swept into high-interest holding accounts or into money market funds until an investor makes a decision on future investments or until the broker can execute already standing orders within the portfolio.
Sweep accounts are a typical business tool, especially for small businesses that rely on daily cash flow but want to maximize earning potential on sitting cash reserves. A business sets a minimum balance for its main checking account, over which any funds are swept into a higher-interest investment product. If the balance ever dips below the threshold, the funds are swept back into the checking account from the investment account.
Depending on the institution and investment vehicle, the sweep process is generally set daily from the checking account, while the return of funds can possibly experience delays. With the changes of regulations on checking accounts, some banking institutions also offer high-interest rates on amounts over certain balances.