Is Your 401(k) Plan Ready for Money Market Reform?
There’s little doubt that everyone remembers the financial crisis of 2008. It was the first recession since 2001, and the longest since the Great Depression era. It also led to a number of changes made to our economic and governmental policies. One of those changes has to do with corporate 401(k) plans and how investments are made into money market funds.
Thanks to a string of events starting in 2007, the Securities and Exchange Commission began closely examining the rules surrounding money market funds. This was due to several factors, not the least of which was the Lehman Brothers bankruptcy. One of the oldest and largest money market funds in the country, the Reserve Primary Fund, had a large stake of Lehman Brothers debt in their portfolio. So, when Lehman went bankrupt, this was disastrous for the Primary Fund. As a result, the NAV (net asset value) for this fund “broke the buck” — meaning the NAV dropped below $1.00 per share and settled at $0.97 cents. Naturally, this made investors nervous and there was a run on money market funds by investors who feared the worst.
Consequently, in July 2014, the SEC approved final rules that amended Rule 2a-7, the governing regulation for money market funds. One of the biggest changes affects how money market funds value their shares. Up until this point, these funds valued their shares at a stable NAV of $1.00. Going forward, only Government and Retail money market funds will be able to utilize this stable NAV. Institutional funds will, instead, have a “floating NAV.” Additionally, retail and institutional funds may impose redemption fees or “gates” during periods of volatility.
These changes will also impact many corporate 401(k) plans, as well. Due to these new restrictions and definitions, money market funds may have to change the way they invest to comply with the new regulations. And, many non-governmental funds may simply close up shop. Currently, over 65% of 401(k) plans hold some type of money market fund. The record keeper, or TPA for your 401(k) plan, will also have some input as they work through contractual and technological issues dealing with the new regulations.
From a fiduciary standpoint, the plan sponsor will have to decide which type of money market is most appropriate for the company’s plan, or whether to invest in money markets at all. Instead of merely accepting the option proposed by a service provider, it is the fiduciary’s duty to investigate all of the options.
So, as a plan sponsor, is a higher yielding fund more important? What about a guarantee of principal? Companies will also need to consider whether having a fund with potential redemption fees might be too confusing for its employees. Enlisting the services of a qualified, 3(38) fiduciary advisor can be a tremendous benefit in helping navigate these decisions.