Bank of America's brokerage arm, Merrill Lynch, has agreed to pay $39 million to resolve allegations that it shortchanged retirement savers by parking their idle cash in accounts that paid almost nothing. The settlement, which requires approval from U.S. District Judge Valerie Caproni, covers certain Merrill Edge retirement accounts from December 15, 2016, to March 15, 2020.
At the heart of the dispute is a common but often overlooked feature of brokerage accounts: the cash sweep. When you hold money in a brokerage account that isn't invested—perhaps waiting for a trade or sitting as a reserve—the firm automatically moves it into a default account, typically a bank deposit or a money market fund. This is called a cash sweep. The idea is to keep your money safe and accessible, but the interest rate it earns can vary widely.
According to the lawsuit, Merrill Lynch's default sweep for some online retirement accounts paid interest rates of just 0.05% to 0.14% annually. During the same period, other cash options, such as high-yield savings accounts or money market funds, were paying closer to 2% or more. For a retiree with a six-figure balance sitting in cash, that difference could amount to thousands of dollars in lost interest each year.
Why the settlement matters
Merrill Lynch, a unit of Bank of America, did not admit wrongdoing. In a statement, the firm said it believes its practices were appropriate but agreed to settle to avoid the cost and distraction of litigation. The settlement is not an admission of liability, but it does signal that regulators and plaintiffs are scrutinizing how brokerages handle client cash.
This case is part of a broader trend. In recent years, regulators and investor advocates have pressured brokerages to be more transparent about cash sweep rates and to ensure that clients earn a fair return on uninvested funds. The issue gained prominence when interest rates rose sharply after 2022, making the gap between sweep rates and market rates even more glaring.
For everyday investors, the lesson is straightforward: don't assume your brokerage is paying you a competitive rate on idle cash. Even in a low-rate environment, a difference of a percentage point or two can add up, especially for larger balances or long holding periods.
What it means for your money
If you have a brokerage account—whether for retirement or regular investing—it's worth checking what your cash is earning. Many firms offer alternatives to the default sweep, such as higher-yielding money market funds or short-term Treasury ETFs. You may need to actively select these options, as the default is often the lowest-paying choice.
The settlement covers a specific window and a specific set of accounts, so not all Merrill Edge customers will automatically receive a payment. If you held a Merrill Edge retirement account during the covered period, you may be eligible for a share of the $39 million. The court will need to approve the settlement and set a claims process, so affected account holders should watch for official notices.
This case also highlights the importance of reading the fine print. Brokerage fee schedules and account agreements often disclose sweep rates, but they can be buried in dense documents. A quick check of your monthly statement or online portal can reveal what your cash is earning.
For investors who prefer to keep a portion of their portfolio in cash, the takeaway is to treat cash as an investment decision, not an afterthought. Compare rates across banks, money market funds, and even Treasury bills. In today's environment, where interest rates are still elevated relative to the past decade, the difference between a 0.1% sweep and a 4% money market yield is significant.
The settlement is a reminder that even large, reputable firms may not always act in your best interest when it comes to the small details. While $39 million is a modest sum for a company the size of Bank of America, it sends a message that investors are watching—and that they expect fair treatment on every dollar, not just the ones actively invested.
As the case moves toward final approval, investors would do well to review their own brokerage cash arrangements. A few minutes of research could put hundreds of dollars a year back in your pocket, with no change to your investment strategy.
