The fundamental idea of 401(k) and similar defined contribution plans is that the participant makes the investment decisions.
But that is not the way it is working with money market funds in some plans. That's because some bundled providers have closed their safest money market funds to new contributions, forcing participants into less safe options.
Vanguard Group, for example, not only closed the Vanguard Federal Money Market Fund to new accounts on June 2, but also closed it to new money from existing defined contributions clients. The decision was made to limit the need to purchase new short-term Treasury and federal agency securities “that offer negligible yield” and “protect the interest of current fund shareholders,” according to a company statement.
Vanguard officials suggested defined contribution clients move to the Vanguard Prime Money Market Fund, which, although 60% of its assets is invested in Treasury and government agency debt, also invests in corporate debt securities. Vanguard, like a number of other major mutual fund companies, closed its Treasury money market funds to new contributions or imposed other restrictions earlier this year.
But what about plan sponsors that want to keep a government agency or Treasury securities money market fund, the ultimate safe investment vehicle, available for their participants, especially in this time of turmoil in the markets?
Vanguard won't allow clients on its platform to move to a money market fund provided by another vendor.
Bundled providers, although they allow funds of other vendors into their platform, typically permit only their own funds as the core investments: index funds; target-date funds; and money market funds. That is the case with Vanguard.
Plan executives who want to see if they can find a suitable Treasury or government-agency fund from another vendor outside the platform are out of luck.
The current situation shows the limitations of the bundled provider model. It isn't flexible enough to meet the needs of today's market, and needs to be re-evaluated.
Fiduciaries who accept such restrictions without thoroughly exploring other alternatives do so at the risk of liability if something goes wrong.
One Vanguard plan sponsor client, for example, specifically chose the Vanguard Treasury fund for participants who wanted the ultimate in safety. When that fund was closed to new money, the sponsor moved into the Vanguard Federal fund. Now it is forced to move again to another money market fund, further from the safety of government-only securities.
Vanguard, while it closed its Treasury and Federal funds to new contributions from defined contribution plan participants, has kept them open to retail clients, who may invest up to $10,000 per day per fund account, which could mean a total of $30,000.
Other money managers face the same challenges, Rebecca Cohen, a Vanguard spokeswoman, said.
Money market funds have been considered a commodity, which might explain why defined contribution plan executives have so far accepted the restriction to the bundled providers' own core funds. But the credit crisis and market meltdown have made the availability of a virtually risk-free option even more important than it was, while at the same time provider restrictions have changed the ability of participants to use the safest funds.
Plan sponsors, as fiduciaries, have the obligation to assess whether they want to accept such restrictions or move to a new platform. Whatever they do, they should not make a decision by complacent acceptance of a vendor's requirement, or a casual review. They need to document the reason for their decision.
Perhaps the status quo is the most cost-effective, risk-reward platform, but the sponsors need to determine that is so.