According to the Investment Company Institute, approximately 18%% of all mutual fund assets are invested in money market mutual funds. An even higher percentage reflects the investment in money market mutual funds held by participant-directed defined contribution plans. Many of these plan participants believe that their retirement money is “safe” in a money market mutual fund since these funds are thought to be “guaranteed” to maintain a fixed target value of $1.00 per share. Plan participants do not, as a rule, appreciate the risks inherent in money market mutual funds that in certain market conditions might “break the buck.”
On July 23, 2014, the SEC promulgated a rule (the “MMF Rule”) addressing what it believes could be heavy redemptions of money market mutual funds in the event of economic stress. The MMF Rule intends to make information about money market mutual funds, particularly inherent risk factors, more transparent.
Money market mutual funds offer a return of principal, liquidity and a rate of return based on the market. The net asset value (NAV) per share of a money market mutual fund changes daily in response to market factors, but the funds are designed to retain a stable share price that is typically $1.00 per share.
Federal rules require money market mutual funds to invest in short-term investments with minimal credit risk and high quality. But even investments that carry these characteristics are subject to the vagaries of the market place, and significant changes in market factors can cause money market mutual funds to deviate from their target value.
The MMF rule requires institutional prime money market mutual funds to use a floating NAV, to impose default liquidity fees on non-governmental money market mutual funds when certain conditions of economic stress exist, and to give money market mutual funds the flexibility to institute liquidity fees and/or “redemption gates” under certain conditions of economic stress.
The floating NAV applies to non-government, non-retail money market mutual funds. It prevents institutional funds such as those held by large 401(k) plans from maintaining a stable $1.00 share price.
Government money market mutual funds are invested in cash, government securities and/or repurchase agreements collateralized with cash or government securities. Retail money market mutual funds are those that are reasonably designed to limit all beneficial owners of the fund to natural persons. Both government and retail money market mutual funds are exempt from the liquidity fee and redemption gates provisions, but they can apply them if they disclose that they do so in their prospectus.
It will take up to 18 months for these rules to become fully implemented. During that time, it would behoove plan administrators and their investment advisors to reassess the type of money market mutual fund held by the retirement plan and determine if it continues to be a proper investment for the plan. Additional information regarding the fund and how it works might be required to be distributed to participants. And, it may be that institutional funds, irrespective of their lower cost structures, should be replaced by government money market mutual funds in order to meet the participants’ expectation of safety. The plan fiduciaries will have to review new prospectuses to determine if their plan’s government or retail fund might impose liquidity fees or redemption gates. Of course, procedural prudence will, as always, be required in evaluating the propriety of the money market mutual fund available in a participant-directed defined contribution plan.