What is Money Market Reform?

In 2014, the Securities and Exchange Commission (SEC) approved new rules under the Investment Company Act of 1940, amending the operation of money market mutual funds.  These rules take effect October 14, 2016 and will impact 401(k) and qualified retirement plans.  Pension Inc. is taking direction from plan sponsors and advisors to choose a new money market fund or cash investment option (when necessary) to avoid subjecting participants to potential redemption gates, liquidity fees or fluctuations in net asset value (NAV).

What is a Redemption Gate?

A redemption gate is a temporary measure that may be implemented by a fund’s board of directors that limits redemptions in a fund for a short period of time (up to 10 business days in a 90 day period). Its purpose is to prevent a run on a fund in times of market stress.

What is a Liquidity Fee?

For investors who require access to their cash in times of stress, a fee may be levied in order to pay for that liquidity (i.e. investors might be required to pay a fee if they redeem shares during this time). This may be applied at the discretion of the board of directors in the best interest of shareholders of the fund.

What is Floating NAV?

Money market funds offered to institutional investors will be required to “float” their NAV rather than maintain the stable $1 net asset value.  Prime and tax-exempt money market funds will be impacted based on the type of investors in the fund. Government and retail money funds will continue to be able to offer shares at a stable NAV.  Fluctuating NAV would impact investors looking to money market funds as a stable investment option.

Current Action

As there is little standardization across money market funds, retirement plans are being reviewed individually by the plan advisors (and Pension Inc.)  If you are affected by the Money Market Reform rules, plan specific information will be communicated regarding any changes to the plan investment offering.

Full SEC Ruling

For additional information, follow the link to the SEC Press Release on Money Market Reform.