Merrill Lynch to pay $39 million over cash sweeps that paid 0.05% to 0.14% while rivals paid about 2%

Bank of America's Merrill Lynch unit has agreed to pay $39 million to settle a class action claiming it paid brokerage customers near-zero interest on idle cash in their retirement accounts, Reuters reported on Wednesday. The settlement papers were filed late Wednesday in Manhattan federal court and need approval from U.S. District Judge Valerie Caproni. The deal heads off a trial that had been scheduled for mid-October. Merrill denied wrongdoing, and a Bank of America spokesperson declined to comment, according to Reuters.

What the case was about

The plaintiffs held Merrill Edge online accounts between December 15, 2016 and March 15, 2020. They said Merrill breached its client agreements by automatically sweeping their uninvested cash into bank deposit accounts that paid less than a "reasonable rate." The complaint said those sweep accounts yielded 0.05% to 0.14% a year while other brokerages were paying customers about 2%.

A cash sweep is the default parking spot for money sitting uninvested in a brokerage account: dividends waiting to be reinvested, proceeds of a sale, a contribution not yet put to work. For many accounts it is simply where cash lands by default. Many large banks and brokerages have been sued over low-yielding sweeps, Reuters noted, especially in 2023 and 2024.

The number behind the number: what the gap costs today

The lawsuit covered a period when short-term rates were low. They are not low now. The 3-month Treasury bill yielded 4.20% on Wednesday and the 1-month bill 4.02%, according to the Treasury's daily yield curve. Some illustrative arithmetic on $50,000 of cash left idle for a year:

The gap at the center of the lawsuit was roughly 1.9 percentage points. Between a near-zero sweep and today's bill yield it is about 4.1 points, more than twice as wide. Our earlier story found the national average interest checking rate at 0.07% against bills above 4%, so low default rates on cash are not a thing of the past.

Who it actually hits

The people most exposed are not active traders, who tend to move their cash, but accounts that sit: an owner's SEP IRA or solo 401(k) funded once a year and left alone, a retirement rollover that landed in cash and was never invested, a business brokerage account holding a tax reserve. In those accounts the sweep rate is the rate, whatever it is, until someone picks something else.

The practical step is simple and costs nothing: look up the current sweep rate on each account and compare it with the Treasury bill yield. Whether to move cash, and where, depends on the account's rules and the owner's needs. The settlement itself changes nothing for current customers and applies only to the class period if the judge approves it.

Sources: Reuters; U.S. Department of the Treasury. Interest figures are illustrative arithmetic. This is market information, not investment advice.