The widely-anticipated reforms that came with the money market regulations that went into effect in October 2016 brought about its own set of changes that affected investors of all kinds. While these reforms actually began as rules adopted by the Securities and Exchange Commission (SEC) in 2014, when the new regulations of money kicked in, one longstanding “safe” retirement plan investment option changed forever. Thew new money market rules have since changed short-term cash investing for many--depending on the type of money market fund owned. This is what you need to know about the Money Market Reform Act's implications since then.
Explaining the Changes
According to the SEC, the new regulations were 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, governmental, 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
As a result of the Money Market Reform Act, institutional money market funds were required to move from a $1 fixed price to now maintain a floating net asset value (NAV). This means funds will no longer be able to set the 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
In addition, the new regulations allowed 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 included 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.
While the wave of change has since been absorbed into modern financial markets, many investors had to evaluate their best options. For example, if at the time an individual's money market fund resided in their employer’s 401(k) plan, it was up to their employer to decide whether to choose another cash equivalent or stick with what was offered currently. While some employers switched to government money market funds, others went to FDIC insured bank deposits or stable value funds. Regarding options in your 401(k) change, the following questions are helpful 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
Stable value funds are not mutual funds. 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, 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, investors could be hurt badly.
The Bottom Line
Depending on if a employer decided to keep their money market fund offerings at the time, investors should always know their redemption options and possible pitfalls before electing to keep money in those funds. For example, it's important to consider the risk of replacements such as stable value funds, as well as comparing it to potentially lower-yield but also lower fee advantages of government money market funds.