If you’re a plan sponsor, you should be aware of the new money market rules going into effect this October and how they may affect your plan. After the 2008 financial crisis, the Securities and Exchange Commission (SEC) went to work on regulations that would address some of the vulnerabilities in money market funds that were evidenced by the crisis. New rules were passed in July 2014, but implementation was postponed until October 14, 2016 to allow investors time to prepare. With only a few months left, it’s time to make sure you are ready.
The regulations separate money market funds into several categories with different rules for each category. They will now be divided into retail funds, in which only “natural persons” may invest, and institutional funds, to which businesses, organizations, and other institutions are limited. Defined contribution plans may use retail funds, since the ultimate investor is the individual, but defined benefit plans will be limited to institutional funds. Money market funds are further divided into government, prime, and municipal/tax-exempt funds. Government funds are defined as funds that hold at least 99.5% of assets in cash and U.S. Treasury securities.
The new rules require prime and municipal tax-exempt institutional funds to use a floating NAV, calculated at market value to the fourth decimal, rather than a stable NAV of $1 per share. Intended to prevent institutional investors from taking advantage of price discrepancies, this new rule will likely result in frequent small fluctuations in institutional money market funds. Retail funds and government funds may continue to use a constant NAV rounded to the nearest penny, which will typically remain constant at $1.00.
Fees and Gates
Prime and municipal/tax-exempt funds will now have to charge liquidity fees and impose redemption gates if a fund’s weekly liquid assets drop to a certain threshold. This applies to both retail and institutional funds. Government funds may voluntarily adopt these provisions, provided they are disclosed to investors. This rule is designed to help prevent the type of heavy redemptions seen in the 2008 financial crisis.
Plan fiduciaries will want to take a look at their existing money market funds and the provisions of their plan to make sure that there are no conflicts with the new rule. For instance, plans that use money markets as qualified default investment alternatives (QDIAs) may find that the imposition of fees and gates in the first 90 days of investment violate QDIA rules. Any other provisions that require a plan to make timely payments or distributions from a money market fund may also need to be addressed, as a redemption gate could interfere.
Defined benefit plans that use money market funds will have to invest in institutional funds, but defined contribution plans can invest in either institutional or retail funds. However, plan sponsors who wish to use an institutional fund will have to consider the implications of the variable NAV and how participants might respond to fluctuations in their capital preservation fund. Sponsors who have both DB and DC plans should consider their strategy and how to choose funds that will be most appropriate for each plan.
Lastly, the costs of money market options may increase as managers take on new disclosure and reporting obligations and stress test requirements. Now is the time to plan ahead. Work with your investment consultant to review your plan’s money market fund.
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To read the full fact sheet from the Securities and Exchange Commission, visit:
To read Charles Schwab’s white paper, “New rules for money market funds,” visit