Employers have drastically mixed up the “safe” investment options offered in their defined contribution plans in response to new rules that came into effect last year regarding money market funds.
The Securities and Exchange Commission's rules, which came into force in October, instituted new investor safeguards for money market mutual funds that included special fees and redemption restrictions, as well as a floating net asset value.
The changes have pushed DC plan sponsors to evaluate their capital-preservation funds and adopt different funds that aren't subject to these restrictions.
“A lot of plans aren't doing anything until they're forced to. This really forced them to,” Brady Dall, a retirement plan adviser at 401(k) Advisors Intermountain, said of the SEC reforms, which were adopted in 2014.
According to the consulting firm Callan Associates, 64% of plan sponsors either changed to a different money market fund or eliminated their money fund altogether within the past two years, largely because of the rules.
Of the employers that changed or replace their money fund, nearly 13% added a stable value fund, which aren't subject to the SEC reforms, and 61% adopted a government money market fund.
Government funds are allowed under the SEC rules to maintain a stable $1 net asset value. The also have the option to impose redemption fees and gates, but aren't required to. Prime funds, on the other hand, must float their NAV, meaning their share price may deviate from $1 and impose gates and fees.
Sean Deviney, head of the retirement plan department at Provenance Wealth Advisors, said there was “100% action rate” among his clients in response.
“Nobody is left in prime [funds],” Mr. Deviney said. “They've either moved to a government money market fund or moved to stable value.”
Several fund providers automatically changed their non-government money market funds to a government version, and in some cases plans wanted to be automatically defaulted into that new version, Mr. Deviney said.
Government funds now make the most sense for employers under new rules in order to avoid restrictions imposed by other money funds, according to Jeff Snyder, vice president at the consulting firm Cammack Retirement Group.
Using government funds also helps employers from a communication standpoint, because they can avoid receiving confused or angry phone calls from some employees agitated about not being able to redeem money.
The SEC rules put stable value funds and money market funds on more of an “equal footing,” so some plan sponsors' hesitations to adopt stable value were reduced, Mr. Deviney said.
That's because stable value fund contracts typically impose their own sorts of redemption gates, whereby an employer wishing to eliminate a particular stable value may be required to wait a certain period of time, perhaps 12 to 24 months, to switch without penalty, Mr. Deviney said.
As interest rates have been persistently low, stable value funds have seemed a more attractive option to some when compared with money market funds, according to Mr. Dall.
While many money funds have yielded negative returns for investors net of fees over the past several years, Mr. Dall sees stable value funds yielding between 1.5% and 2.4%, roughly, net of fees.
“Participants are almost moving backwards in some ways,” he said. Indeed, the argument of low interest rates on money funds has cropped up in several 401(k) lawsuits within the past year.
Almost 53% of 401(k) plans use a stable value fund, and 46% use a cash-equivalent fund such as a money market or certificate of deposit, according to the Plan Sponsor Council of America.
However, Mr. Dall cautions that “they are pretty complex vehicles compared to the traditional mutual fund,” and that, similar to target date funds, they require much adviser due diligence.
For example, because the funds come with an insurance guarantee, sometimes through multiple insurance companies, advisers must understand how that is delivered, in addition to the investment profile of the fixed-income securities within the insurance wrapper (treasuries, mortgage-backed securities, floating rate notes, for example), Mr. Dall said.