Tighter SEC regulations prompting sponsors to look for other options
Consultants expect many defined contribution plans to move away from prime money market funds in the face of a looming October deadline for new SEC regulations that might create complications for sponsors.
They say the key issue for DC plans is the Securities and Exchange Commission rule requiring providers of prime money market funds to create redemption gates — or limits — on withdrawals by participants and to establish fees on withdrawals to prevent a run on the funds.
“It would be hard to explain to participants why they can't access their money” if a redemption gate were imposed, said Philip Suess, a Chicago-based partner at investment consulting firm Mercer LLC. “Sponsors have to determine their ability to live with redemption gates.”
Among Mercer's DC clients, “it was very quiet” after the SEC issued its rules in July 2014 until the fourth quarter of 2015, he said. “We've now reached the point where sponsors are paying attention. They are realizing that it takes time to implement changes.”
Among Mercer's DC clients that have made a decision, “a lot” have moved to government money market funds, which won't be affected by the new rules, he said. “We haven't seen a lot of interest in ultrashort bond funds or stable value,” said Mr. Suess, adding that a client staying with a prime money market account “is the exception.”
Fee amounts and redemption-gate terms depend on how much a money-market fund's weekly liquid assets fall below the fund's total assets, the SEC said. Fund providers have some leeway in setting the amount of fees and length of redemption-gate limits.
Although the prospect of imposing redemption gates and fees might be remote, it “will be so far beyond participants' expectations” if fund providers enforce them, said Christopher Lyon, a partner at Rocaton Investment Advisors LLC, Norwalk, Conn. Such a jolt to participants holding a conservative investment could shake their confidence, he said.
Many Rocaton DC clients already offer government money market funds, and those with prime money market funds likely will switch to a government fund because of the SEC rules, Mr. Lyon said. For plans contemplating a change, Rocaton has been recommending since mid-July that they act quickly to avoid being placed in a queue by their record keepers in case of a last-minute rush of sponsors switching funds.
Complicated new rules
“The fees and gates are too complicated for participants,” said Martha Tejera, president of Tejera & Associates, a DC investment and plan-design consulting firm in Seattle. “Prime money market funds will disappear from 401(k) plans.”
When the SEC issued its regulations, it exempted DC plans from the floating net asset value requirement that will apply to prime money market funds held by institutions. The SEC said such funds in qualified DC plans will be classified as “retail” funds because their investors are individuals rather than corporations or institutions.
Despite the long lead time from the SEC's announcement to enactment, DC industry members say many sponsors still haven't declared if they will keep a prime money market fund or switch to a government money market fund, stable value fund or ultrashort bond fund.
“Our client base has been pretty quiet,” said Lorie Latham, a Chicago-based director at Willis Towers Watson PLC, who directs U.S. strategy for investments for DC plans. “We've done quite a lot of education, but there hasn't been much movement. There's still time for sponsors to act.”
In a survey of 70 DC sponsors offering some form of money market fund, Callan Associates Inc. found that 58.7% of plan executives were still unsure about what they would do.
The survey said 17.4% of plan executives won't change anything because they don't offer a prime money market fund, while 13% said the SEC rules affecting prime money market funds are acceptable. Also, 6.5% said they would switch to a stable value option from a prime money market fund, and 4.3% would move to a government money market fund from the prime money market fund. (These responses are part of a broader survey that Callan will publish later this month.)
“There will be an aggressive timeline after the first quarter” for sponsors to meet the SEC deadline, said Lori Lucas, the Chicago-based executive vice president and defined contribution practice leader for Callan.
90 days to switch
Consultants say a money market fund switch by sponsors could take as much as 90 days to complete. The plan's investment policy committee has to make a decision, and executives must find a replacement fund. Record keepers also need time to accommodate the changes, and participants must be informed.
Robert Salerno, senior vice president, Fidelity Investments, Boston, said he's confident Fidelity's record-keeping business can handle DC clients' money-market fund decisions.
Right now, “not many” clients have changed their money market funds, said Mr. Salerno. “They probably have initial indications what they want to do. We won't see a majority of decisions being made until the second quarter.”
Fidelity has made some changes affecting all clients - not just DC plans. For example, it has converted three prime money market funds to government money market funds, and it merged a prime fund and a government fund to create a new government money market fund.
In a recent survey by Pensions & Investments and Rocaton, DC plan sponsors said they believed their peers most likely would replace the prime money market funds with a government or Treasury money market fund. The second most popular outcome would be moving to a stable value fund, followed by retaining the prime money market fund. Sponsors were not asked what they planned to do themselves.
When record keepers and consultants were asked what sponsors might do, the P&I/Rocaton survey said the top three choices were shifting to a government or Treasury money market fund, offering a stable value fund and choosing an ultrashort bond fund.
The survey reported that 79% of sponsors and 84% of other DC industry members said there must be a “proactive disclosure” to participants about redemption gates and liquidity fees for those plans retaining prime money market funds. In an interview, Mr. Lyon said he was concerned that some money market providers might not explain these requirements “beyond the bare minimum notice.” n
This article originally appeared in the January 11, 2016 print issue as, "Prime money market exits likely ahead of tighter SEC regulations".