Every CFO and their finance department is intently focused on managing the corporation or organization’s cash and bottom line. Metrics are reviewed monthly, if not more frequently, to understand the company’s revenues, liabilities, budget, capital reserves, and operating capital (cash). Additionally, concerted efforts are made to get the best return on a corporation’s cash assets – which in the large corporate market can serve as a catalyst to acquisition activity, stock buybacks, and other strategies.
So why would an organization approach their retirement plan any differently? Under ERISA law, corporations and organizations have, arguably, even greater obligation and fiduciary liability to the retirement plan and its participants compared to their corporate assets.
In October 2016, The Securities and Exchange Commission’s (SEC) new rules governing money market funds will go into effect. The purpose behind these rules is for money market funds to address a few concerns:
- Address structural concerns exposed during the 2008 “Great Recession”;
- Create a distinction between an “institutional” and “retail” fund;
- Have certain money market funds trade like other mutual funds at NAV (net asset value);
- Provide investors with additional protections during periods of market volatility.
So the question we ask (and help solve) with Committees is quite straightforward, “What are you doing to prepare for the upcoming Money Market reform rules?”
What’s going to happen?
The new SEC rules have varying impact on the types of money market funds that an investor uses (Prime, Municipal, Government, or US Treasury). When these rules go into effect, institutional prime and municipal funds must transact at a market-based NAV, which means the value of one share could fluctuate – where it has historically been pegged to $1.00000. Retail prime, municipal, and government funds can continue to use the $1.00 stable NAV for investors. Additionally, The Board of such funds has the power to impose liquidity fees (up to 2% on all redemptions) or suspend the ability for redemptions (called a “gate”), if the fund’s liquid assets fall below a certain level. The good news is that Government money market funds are not subject to the fee and gate provisions, though they reserve the right to do so.
While many groups opposed and fought hard against the SEC on these regulations, these new rules may strengthen the money market fund sector and provide protection and transparency to investors. However, many employers will look to avoid funds that carry a floating NAV or those that impose restrictions on distributions. Are you confused yet?
What should you do?
Employers, Retirement Committees, and Plan Fiduciaries should, at all times, take careful consideration of their plan’s “cash equivalent” option. Like selecting and monitoring all other investment options, selecting a cash equivalent is an important fiduciary decision. The upcoming money market reforms are shining a light on this requirement of a plan fiduciary.
Many recordkeepers (or vendors) are proactively transitioning from their current money market fund (which may be a prime fund) to the government money market fund. This benefits the plan and its employees (investors) since there are no requirements for 1) floating NAV; or 2) liquidation restrictions such as fees and/or gates. However, this automatic transition does not satisfy your responsibilities.
Many Committees think of money market funds as “safe” investments. We recall historical attributes when the funds where an easy place to invest without restriction, protect capital, and generate a small return. Those days have passed as the low-interest rate environment since the Great Recession has yielded a 0% return for the vast majority of money market funds, and, in fact, likely produced a negative real return even in our low-inflationary environment.
Furthermore, two recent high profile lawsuits attack an employer’s decision to use a money market fund instead of a stable value or guaranteed account alternative. In February 2016, participants in the Chevron Corp. 401(k) plan sued the company and its executives alleging breaches of fiduciary duty. The complaint alleges that Chevron offered a Prime Money Market Fund as its sole capital preservation option since 2010 and “imprudently and disloyalty… failed to provide a stable value fund…”* Similar claims were just made in another high profile case, Bell v. Anthem, Inc. complaint, recently filed at the end of 2015. Is this a new start to money market litigation in retirement plans?
This isn’t to say that a Committee needs to immediately move out of their money market fund to an alternative. It does, certainly, highlight the importance of an objective, consistent, and frequently applied process to review all of the plan’s investment options – even something as mundane as the money market or cash equivalent option. The process should consist of the following:
- A comprehensive review of the plan’s current cash equivalent investment option, including features, benefits, restrictions;
- A comparative analysis against alternative options available within the marketplace;
- Documentation of the review process and Committee discussion;
- Documentation and minutes of the Committee decision.
Want more information? Prudential Financial provided us with some great resources. I think these do a great job of explaining the money market regulations and how stable value vehicles (a common alternative to money market funds) work for investors. Hopefully, this information, among other resources, can help make it easier for a Committee and plan fiduciaries to understand, review, and feel comfortable with the plan’s cash equivalent.