Some state-facilitated retirement plans are scrambling to address a problem that low interest rates are stirring up in the money market funds they offer as default investment options.
With yields dipping to a level where they no longer cover the funds' fees, executives of state-run plans fear a situation they once brushed aside as unlikely: workers at risk of seeing their hard-earned savings post net negative returns in what many take to be an uber safe investment.
To spare savers such disappointment, the nation's largest state retirement programs — OregonSaves, Illinois Secure Choice and California's CalSavers — have been working with their service providers to lower fees and in some cases change the structure of their default options to ensure that fees do not exceed fund yields.
Illinois Secure Choice waived both the program management fee and state fee of 5 basis points for its default 90-Day Hold Fund investment option, while OregonSaves reduced the administrative fee for its Capital Preservation Fund, the default investment for workers' first $1,000 of savings.
CalSavers, meanwhile, worked with its service providers to waive the underlying fund fee for its default Capital Preservation Fund and offset the program administrator's fee by reallocating money from the provider's marketing budget.
"We didn't want to be defaulting people into essentially a guaranteed negative performance in a fund that we call capital preservation," said Katie Selenski, the Sacramento-based executive director of the $18 million CalSavers program, which rolled out statewide in July 2019.
Like OregonSaves, the CalSavers program defaults savers' first $1,000 of contributions to the Capital Preservation Fund with subsequent contributions invested in an age-appropriate target-date fund. Roughly $14 million, or 71% of CalSavers' total assets, are in the Capital Preservation Fund.
CalSavers' fix, however, is unsustainable over the long term as the program grows to scale, Ms. Selenski said. "We've been able to work with our business partner and we found a way to reallocate marketing funds to support savers in this option so that none of them have actually had losses in that fund, but it's not a sustainable approach," she said.