Cash Sweep
A cash sweep is the automatic daily movement of brokerage-account cash balances into a yield-bearing program. The default sweep options vary by custodian: government money market mutual funds, FDIC-insured deposit programs (multi-bank IDP), or proprietary cash management products. Rate, FDIC coverage, and tax treatment differ across the three; the default-sweep choice is one of the largest hidden cost differences across major brokers.
Cash-sweep economics matter at scale. A household with $200,000 of average idle cash across multiple accounts captures meaningful annual yield from the right sweep choice — and pays meaningful opportunity cost from the wrong one. As of 2025, the spread between best-in-class money-market sweeps (4.0%+ on government MMFs) and proprietary 'sweep deposit' programs (0.10%–0.40%) was 3+ percentage points. On $200,000, that's $6,000+ per year of yield difference for the same idle cash.
The regulatory framework matters. Money market mutual funds (MMFs) are SEC-regulated under Rule 2a-7; they're not FDIC-insured but are SIPC-protected ($500,000 cash + securities). FDIC-insured deposit programs (IDPs) sweep cash into multi-bank programs — Schwab's Bank Sweep, Fidelity's FDIC-Insured Deposit Sweep, etc. — providing FDIC coverage up to ~$250,000 per bank in the program (typically aggregating to $1.5M–$5M total). Proprietary cash-sweep products at full-service firms (e.g., Merrill's Preferred Deposit) are bank deposits with single-bank FDIC coverage.
Tax treatment differs. MMF distributions are typically dividends (taxable as ordinary income, partly qualifying as US-Treasury-source for state-tax exemption in MMF subtypes). FDIC-deposit sweep interest is ordinary income (no state-tax exemption). Some MMFs are tax-exempt municipal MMFs (federally tax-exempt at the cost of slightly lower yields).
The operational risk: 2008-era 'breaking the buck' on prime MMFs — when the Reserve Primary Fund's NAV fell below $1.00 due to Lehman exposure. The SEC subsequently tightened MMF rules (Rule 2a-7 amendments, 2010 and 2014); modern government MMFs are extremely safe but technically still have NAV-fluctuation risk. FDIC programs avoid this risk but cap at the per-bank coverage limit.
| Government MMF | FDIC IDP | Proprietary deposit | |
|---|---|---|---|
| Typical 2025 yield | 4.0–4.5% | 1.5–3.0% | 0.10–0.50% |
| FDIC coverage | No | Yes (multi-bank) | Yes (single-bank) |
| SIPC protection | Yes ($500k) | Yes (secondary) | Yes (secondary) |
| Tax character | Dividends, partial state-exempt | Ordinary interest | Ordinary interest |
| NAV fluctuation risk | Theoretical | None | None |
Synthetic brokerage accounts should track sweep program (MMF / IDP / proprietary), current rate, FDIC coverage applicable. The longitudinal data should reflect rate changes — sweep yields move with the federal funds rate, with notable jumps in 2022–2023 when rates rose. Households should mix sweep choices to test the customer-impact analytics: ones who optimized into high-yield MMFs vs. ones who left default cash in low-yield bank sweeps.
Common pitfalls
- Treating cash sweep as a default — many brokers' default sweep is the LOWEST-yielding option (the broker captures the spread).
- Forgetting FDIC coverage limits — a $1M idle cash balance in a single-bank sweep has only $250k of FDIC coverage; the rest is uninsured.
- Assuming MMF NAV is fixed at $1.00 — government MMFs typically maintain $1.00 NAV but technically can fluctuate; institutional prime MMFs use floating NAV.
- Letting state-tax-exempt MMF treatment go unclaimed — partial Treasury-source distributions reduce state taxable income; many investors miss this.
Examples
Household with $250,000 average idle cash at major full-service firm. Default sweep: 0.30% bank deposit program ($750/year interest). Optimized: actively reinvest into government MMF currently yielding 4.10% ($10,250/year dividends). Net difference: $9,500/year — pure yield arbitrage by switching the sweep choice. Most firms allow the switch via simple account-management UI.