Money market regulations that went into effect in October 2016 actually began as rules adopted by the Securities and Exchange Commission (SEC) in 2014. When those rules kicked in, one longstanding “safe” retirement plan investment option changed forever. The effect of these rules depends on the type of money market fund you have. (For more, see The Pros and Cons of Money Market Funds.)
Explaining the Changes
According to the SEC, the new regulations are designed to provide “structural and operational reforms to address risks of investor runs in money market funds while preserving the benefits of the funds.” The rules establish three broad categories of money market funds: retail, government and institutional. Institutional money market funds include those often available in your employer’s 401(k) plan or other similar retirement vehicles. There are three main components to the new regulations.
Floating Net Asset Value
Institutional money market funds must now maintain a floating net asset value (NAV). This means funds will no longer be able to set a constant $1 per share price. Instead, share prices will fluctuate with the market. The floating NAV rule does not apply to government and retail money market funds, which can still offer the stable ($1 per share) NAV.
Fees and Gates
This rule allows boards of directors for money market funds to impose fees or even suspend redemption of shares temporarily in times of financial stress. The trigger for a fee or temporary suspension (gate) for institutional and retail money market funds is when the weekly level of liquid assets falls below 30% of total assets. At that time the fund’s board may impose up to a 2% redemption fee. It can also suspend redemptions for up to 10 business days in a 90-day period.
If a fund’s liquid assets fall below 10% of total assets, the board is required to impose a redemption fee of up to 1%. However, the board has the discretion to impose a lesser or higher fee – up to 2% – in the best interests of the fund. The same rule allows for suspension of redemptions for up to 10 business days in a 90-day period applies. Government money market funds may, but are not required to, impose fees or gates.
Portfolio Diversification, Disclosure and Stress Testing
Finally, the regulations include enhanced diversification, disclosure and stress-testing requirements along with updated rules for reporting by money market funds and private funds that operate like money market funds. While important, this final set of amendments is not seen as having as direct an impact on individual investors as the first two.
Questions to Ask
If your money market fund resides in your employer’s 401(k) plan, it’s up to your employer to decide whether to choose another cash equivalent or stick with what is offered currently. Some employers are switching to government money market funds, while others are going to FDIC insured bank deposits or stable value funds. If options in your 401(k) change, CNBC says you should ask the following questions when considering a new fund.
- What is the interest rate?
- How often does it change?
- How often is interest paid?
- What fees are charged?
- Is it possible to lose money in this fund?
- What’s the name of the company behind the fund and how has that company performed in the past?
Stable Value Fund
If your plan offers a stable value fund, you should know that it is not a mutual fund. A stable value fund is a blend of insurance and bonds. This fund comes with a minimum guaranteed rate of interest provided by an insurance company. According to Callan Associates, 65% of U.S. retirement plans offer a stable value fund. Stable value funds had a 1.93% median interest rate recently, compared to a 0.023% average yield for money market funds.
While that interest-rate comparison makes a stable value fund sound impressive, keep in mind that there is more risk in a stable value fund than in a money market mutual fund. The credit quality of both the underlying bonds and the insurance company are two important factors that apply to a stable value fund. This means that if the bonds fail or the insurance company goes belly up, you could be hurt badly. (For more, see Retirement Plans: Shift in Money Market Funds You Can Get.)
The Bottom Line
If your employer decides to keep the current money-market-fund offerings, make sure you know your redemption options and possible pitfalls before you elect to keep money in those funds. If money-market-fund replacements, including stable value funds, are offered, consider those risks as well before deciding to move your money. If a government money market fund is an option, it may have the advantage of no likely fees or gates, but it will also carry a lower yield.