The large mutual fund families are doing everything possible to keep you from moving your 401k money market investments away. BlackRock, Federated, Fidelity and Vanguard have all announced changes to their money market fund offerings which they hope will allow them to retain existing 401k money market balances. These changes are in response to the Securities and Exchange Commission (SEC) 401k money market fund reform rules outlined below.
401k Money Market Fund Changes
The new SEC rules (often referred to as Rule 2a-7 by the mutual fund families) will allow the following money market fund investment manager-friendly changes that are definitely not 401k participant-friendly:
Most 401k plan participants would probably not expect the Net Asset Value (NAV) of their money market fund to fluctuate. However, soon it will become possible to lose money in a prime money market fund. As a result, prime money market funds won’t be quite the safe haven investments they have been in the past.
Although any mutual fund may impose redemption fees, it has never occurred previously in money market funds. In order to allow prime money market fund managers to better manage their portfolio’s in panic situations, the SEC rules allow the imposition of redemption fees.
To provide prime money market fund managers with another tool to manage redemptions during a period of crisis, the new rules allow mutual fund families to impose liquidation restrictions on prime money market fund balances. In other words, during a period of high liquidation requests, a prime money market fund would have the right to withhold redemption requests for a period of time.
For a look at the most frequently asked questions the SEC has received on the new money market rules, visit this link.
What Plan Sponsors Need to do RIGHT NOW!
Given the October 14, 2016 implementation date of the new 401k money market fund rules, your investment committee should have a safe haven investment fund strategy in place as soon as possible. Your investment adviser should help you:
Get rid of any prime money market fund
It would appear that it does not make sense for any 401k plan to continue to offer a prime money market fund after October 14, 2016. It is estimated that up to 50% of all 401k plans currently offer one. Most of the large mutual fund companies are making this easy for you by converting their prime money market funds into government money market funds (which are not impacted by the new rules).
Review your safe haven options
Although many 401k plan sponsors may end up using government money market funds as their safe haven investment option, that may not be the best course of action. Government money market funds have yields that are even lower than prime money market funds.
Plan sponsors should consider stable value and guaranteed rate funds which guard against loss of principal but may have redemption fees and liquidation window restrictions. These funds have yields that are much, much higher than government and prime money market funds.
Another reason to consider stable value and guaranteed rate funds — recent fiduciary breach lawsuits filed against plan sponsors for using money market funds instead of stable value funds. These lawsuits have been filed because of the low yields that money market funds have paid in comparison.
Communicate to participants
Sometime during their careers, every one of your 401k plan participants will probably be invested in your safe haven investment option. Plan participants may value this option more than any other in your plan. As a result, it is likely that you will see a high level of participant interest in these changes.
To avoid unfavorable participant outcomes, make sure you have your safe haven investment fund strategy implemented by October 14, 2016.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or email@example.com.
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or firstname.lastname@example.org or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.