The Security and Exchange Commission (the SEC) has made changes to rules for certain money market funds. If your retirement plan line-up includes a money market fund, then you may need to evaluate the potential impact of those changes and take an appropriate course of action. The new rules became effective on October 14, 2016.
What Happened In response to the 2008-2009 credit crisis, the SEC rolled out a reform intended to increase money market fund transparency, preserve the benefits of these funds for investors, and give fund managers additional tools to manage the flow of redemptions in times of market volatility.
Under the new rules, money market funds have to be classified as either retail or institutional, depending on who invests into them. Depending on the classification of the fund, two key provisions may be applied:
- Traditionally, all money market funds were priced at $1 per share, known as a constant net asset value (CNAV). This model was criticized as not properly accounting for the actual fund value at times of market stress. Under the new rules, funds are required to adopt a floating net asset value (floating NAV) model, where the price per share is expressed in 4 decimals to account for the actual market happenings and to give investors a better visibility into what is going on with the fund.
- Liquidity gates give a fund ability to introduce temporary special fees when its liquidity falls below certain levels at times when redemption activity is unusually high. This is a tool to help the fund operate in the best interest of those who own it; those who want out of the fund will still be able to do it but at an additional cost known as a redemption fee.
- Institutional funds will be subject to liquidity gates/redemption fees and floating NAV requirement.
- Retail funds will continue using the old pricing mode, CNAV, but are subject to the liquidity gates/redemption fees rules.
- Government and Treasury funds are not impacted: their pricing continues to use the old ‘constant’ model and for them the use of liquidity gates/redemption fee approaches is optional.
Why It’s Important Usually, participants use money market funds as a way to manage risk. Risk-averse participants may use these funds as their primary investment. Restrictions on fund redemptions, additional fees, and fluctuating price of an investment that’s traditionally viewed as cash may increase participant anxiety at times when markets are volatile. For this reason it may be beneficial to explore options that are not subject to these requirements and/or alternatives to provide liquidity and preservation of capital.
What You Should Do Plan fiduciaries are called to act in the best interest of plan participants; evaluating developments such as this is part of their duty to monitor their retirement plan’s investments. Questions to ask include: Do we use a money market fund? What has our investment provider done? Should we consider other alternatives? For plans employing services of a financial advisor, this is an excellent opportunity to reach out to them for assistance in analysis and to choose the appropriate course of action. Lastly, whether a fiduciary chooses to make changes to plan’s fund line-up as a result of this investigation or not, the decision should be documented to demonstrate the prudent investment selection and monitoring process.