Is Your 401(k) Plan Prepared For The New Money Market Regulations?
Once upon a time we took it for granted that a money market account would earn an above average interest rate without risking losing money. In the midst of the 2008 financial crisis, the Reserve Primary Fund, our country’s oldest money market fund was forced to lower the net asset value (NAV) of its money market fund below $1 and all of its shareholders saw a loss. This was the first time a major money market fund had to break the $1 NAV, which caused a stir among institutional investors who began mass redemptions. This caused the fund’s assets to decrease from $65 Billion to $23 Billion and had to eventually suspend its operations and begin liquidations.
Because of this situation and others, the Securities and Exchange Commission (SEC) adopted new money market regulations in 2014 that will take effect this October. The new rules will place tighter restrictions on portfolio holdings while enhancing liquidity and quality requirements. The rules require fund providers to institute liquidity fees and suspension gates as a safeguard to prevent a run on a fund similar to the situation that occurred in 2008. The changes will not affect all money market funds in the same way. For example, U.S. Treasury and government money market funds (often referred to collectively as government funds) are exempt from structural changes under the new rules, and can continue to operate in much the same fashion as before. Government money market funds will continue to be eligible to offer a stable NAV to both individual and institutional investors. Furthermore, they will not be subject to redemption restrictions.
Institutional money market funds are often available in employers’ retirement plans. To provide a safe and accessible asset plan sponsors will likely have to change out their fund options, offering a government money market fund or some other alternative in many cases.
Money market funds continue to play an important role by providing liquidity in both stable markets and during times of uncertainty. It is up to your employer to decide whether to choose another cash equivalent or to stay with a current money market fund that could be suspended from redemptions when a participant needs them. If your company chooses to keep the current money market fund in the 401(k) plan, make sure you understand your redemption options and possible concerns before you decide to keep money in this type of fund.