2014 Money Market Fund Reform Requires Attention By Plan Sponsors Summer 2016

Frank Locante

Employee benefit plan sponsors that invest a portion of plan assets in an money market fund (MMF) or that offer a money market fund to participants as part of a program of self-directed investments may soon be asked by plan investment professionals to consider replacing its current money market fund in order to avoid the impact of these reforms.  Changes to Securities and Exchange Commission regulations governing MMFs’ operation will take effect October 14th, 2016.

Since the impact of this reform primarily affects “Institutional MMFs” as opposed to Retail MMFs, it is critical to understand the difference between Institutional Money Market Fund and Retail MMFs.  Institutional MMFs are defined as any fund that does not limit ownership to natural person. Examples include corporations, pension plans, endowments, foundations and certain large individual investors. Retail MMFs have policies that limit owners to natural persons this includes investment through brokerage, health savings accounts, 401(k) plans, section 529 plans and ordinary trusts. Institutional Prime MMFs are those that primarily invest in a corporate debt securities. Institutional Municipal MMFs are those that invest in tax-exempt municipal securities. Institutional Government MMFs are those that invest 99.5% or agreements more of its total assets in cash or government securities (or repurchase).

Reduced Liquidity in Certain Situations

Under the reformed regulations, the board of directors of Institutional Prime and Institutional Municipal MMFs will be empowered with the discretion to impose liquidity fees and redemption gates in certain situations and required in others. If a money market fund’s level of weekly liquid assets falls below 30% of it’s total assets, the money market fund’s a board of directors will have the ability to impose a liquidity fee of up to 2% on all redemption requests. If a money market fund’s level of weekly liquid assets falls below 10%, the money market fund would be required to impose of the liquidity fee of 1% and all redemptions. If a money market fund’s level of weekly liquid assets falls below 30% of its total assets, it’s board of directors could temporarily suspend redemptions. Any gate will be required to be lifted was in 10 business days and MMFs will not be  able to impose a gate for more than 10 business days in any 90 day period.  The obvious intent of such reforms is to enable the boards of directors of certain MMFs to address a run on the MMF during periods of stressed financial markets.   These rules do not impact Institutional Government MMFs.

Floating Price per Share Instead of Constant $1.00 per Share

Institutional Prime MMFs and Institutional Municipal MMFs will be required to transact at a floating Net Asset Value (NAV) that is rounded to the fourth decimal point ($1.0000) instead of a constant $1.00 share price.  Under current rules, all MMFs are allowed to use the amortized cost method of pricing to maintain a stable price per share of $1.00.  Daily share prices of such MMFs will fluctuate along with changes in the market based value of the MMF’s investments.  The SEC believes a floating NAV will reflect the actual fair value and that shareholders will experience changes in their mutual fund’s value event if the portfolio value fluctuates by a little as 1/100 of a cent.   A floating NAV may result in a loss of MMF value over extended periods and this of course, it contrary to the reason plans and participants invest in MMFs.  The new NAV rules do not impact Retail MMFs or Institutional Government MMFs.

Since the liquidity fee and gating reforms were introduced as a means of maintaining stability during stressed financial markets, the expectation is that such means will only be used by money market providers to deal with financial crises’ such as the one experienced in 2008, the Eurozone sovereign debt crises in 2011,  and U.S. government debt ceiling impasses in 2011 and 2013.   Nevertheless, plan fiduciaries most likely will be asked by their investment professionals to assess the risk of retaining a money market fund in their plan that could limit the ability of plan participants’ or themselves to access funds or transfer funds through such means during stressed financial markets.  In addition some fund families may no longer offer Institutional or Retail MMFs. Plan fiduciaries may be asked consider offering alternative investments to a money market fund and their retirement plan, such as an Institutional Government MMFs.