In SEC parlance, a money market fund with only individual investors is called a retail fund. The SEC regulation said providers of prime money market funds must make adjustments to distinguish between a retail fund and an institutional fund.
“The SEC had adopted a test for what is a retail fund, but this is a definition that will be new to the industry,” said Roberta Ufford, a principal at Washington-based Groom Law Group.
The SEC rules don't take effect for two years, and those interviewed said they will need every minute.
“It's time for people to take a breath — and digest this,” said Ms. Ufford said.
Although DC plans can be exempt from the floating NAV, they are affected by new SEC policies covering non-government money market funds.
The SEC has established mandatory and optional redemption fees and enabled fund providers to temporarily close these funds. The goal is to help money market funds manage heavy redemptions, as was the case in the 2008 economic crisis, the SEC said.
These SEC policies — and the need for DC plans to disclose information to participants — are among the reasons consultants predict many plan executives will review whether to keep a prime money market fund or switch to a government one or to a short-term bond fund or stable value fund.
Mercer's Ms. Bailey said that in anticipation of the SEC's final regulation, there was a “significant shift by clients in the last two years” from prime money market funds to government ones. Now, she added, “we don't anticipate a lot of client action immediately until the various (money market) fund boards act on the regulations.”
Ms. Bailey said her firm already has received marketing materials from providers of short-term bond funds just days after the SEC rules were announced, but she declined to identify the providers.
One concern of consultants is how participants will react to seeing disclosures about redemption fees and/or a temporary closing of prime money market funds.
These policies “are different from what participants would reasonably expect,” said Christopher Lyon, a partner in consultant Rocaton Investment Advisors LLC, Norwalk, Conn., and head of its defined contribution business.
Although Rocaton recommends that DC plans educate participants about changes in money market policies, “it doesn't mean they will pay attention,” he said.
“Participants probably won't be interested until a redemption fee or gate is put into place,” said Mr. Lyon, adding that most of his clients don't offer prime money market funds. “For a conservative investor, a redemption fee and not having immediate access to the money market fund could be problematic.”
Given the low yields on money market funds and the new rules, consultants and fixed-income specialists expect DC plans to review alternatives. “This regulation is making sponsors re-think their allocation and what capital appreciation means,” said Mr. Schmit of Towers Watson.
If plan officials believe a $1 constant share price is most important to participants, they might switch to a government money market fund, said Mr. Schmit.
Several consultants said if a client was considering adding — or switching to — a stable value fund, the SEC rules could provide a catalyst. “For those who are leaning toward stable value already, it may be the tipping point if a search is outstanding,” said Mercer's Ms. Bailey. n
