Before the end of 2016 we expect to see a final version of the new “fiduciary” definition. This new definition adds new liability and responsibilities that previously did not exist to many financial advisors. While those advisors that have avoided a “fiduciary” title will adapt to the new normal, one item that may catch them off guard is the SEC changes that impact Money Market Funds (MMF).
The changes to MMF go into effect this October and will now require shorter durations, stricter risk-limiting conditions (which are expected to impact yields), mandated floating instead of a stable $1.00 NAV, permissive or mandatory liquidity fees of up to 2%, and redemption gates that can be imposed if weekly liquid assets drop below a specified percentage. Additional limitations will apply to the gates which can restrict redemptions for a 10-day period within any 90-day period. Such limitations will surely impact durations which in turn will result in lower yields.
With approximately $150 billion in MMF assets held by defined contribution plans according the 19th Annual Stable Value Investment & Policy Survey conducted by the SVIA released in 2014, it is expected this issue will impact many retirement plans and consequently many advisors that are not familiar with fiduciary responsibilities.
Plan sponsors that hold a MMF in their retirement plan will need education on the new rules and the fiduciaries will need to make important decisions regarding the retention of the existing MMF option or the decision to move those cash equivalent assets to another alternative money market or possibly a stable value fund.
Advisors that become fiduciaries under the new rules will have to address this issue by providing the appropriate documentation and research in order to assist the plan sponsor with making an informed and prudent decision.
Issues that advisors will need to be prepared to address include:
Does the plan and/or IPS restrict the use of floating NAV for the cash equivalent option?
Is there a forfeiture account that uses a MMF which pays expenses or reallocates assets held to participants?
Could these restrictions impact the time in which those assets can be accessed to pay fees or reallocate the forfeited amount to participants?
Is it necessary to have two MMFs available to the plan because the MMF held by the forfeiture account is subject to different rules than the one held by the plan for participant investments?
What disclosures must be prepared and distributed to participants and when?
If the MMF is replaced, who is the responsible party for disseminating disclosures, notifications, and communications?
Will the transaction to replace the MMF occur without penalty?
If the MMF is retained, what is the existing proxy voting policy, who is responsible for proxy voting, and is it necessary to vote to approve the changes that will ultimately be presented to shareholders to comply with the new rules?
Do the structural changes to the MMF or redemption fees impact
QDIA qualification for models structured as DIAs?
Should the MMF be replaced with a stable value fund or a government MMF?
Are such investments available through the retirement plan vendor?
Is the available investment option a prudent selection?
Advisors unfamiliar with ERISA’s fiduciary standard of care, but which have become a fiduciary as a result of the new definition proposed by the DOL, will likely have to deal with issues like this in the future. Documentation to support an informed decision and to reduce plan sponsor and advisor liability will be paramount for advisors that have become a fiduciary.
Bottom line, once the new definition is finalized, a fiduciary advisor will become a co-suspect for any fiduciary breach related to the investments. This will require advisors to stay current on investment related issues like the changes applicable to Money Market Funds as well as be prepared to assist the plan sponsor with making a prudent decision.
If you would like an introduction to the retirement advisor groups that have built the operational backroom to support issues like this contact me at email@example.com.