New Money Market Fund Rules in 401(k) Plans

As mentioned in our May 11, 2015 blog post, the SEC adopted rules that affect many types of Money Market Funds (MMFs) including prime funds.

On October 14, 2016, some MMFs will be able to adopt a floating net asset value (NAV), meaning the value of one share could fall below $1. Affected types of MMFs will be allowed to impose “liquidation windows.” What does that mean? Your employee would not be able to get their money out for some period of time, to be determined by the fund manager within certain limits. Finally, affected MMFs will be able to impose back end penalties up to 2% during times of fiscal stress.

In our combined 24 years experience of working closely with employees investing in their companys’ 401k plan, the average person believes that MMFs are reasonably safe places to park money in a 401k plan, particularly as they near retirement. These new rules significantly challenge those assumptions.

Review your Options in Advance

If your 401k includes a MMF as an investment option, it is important to begin the investigation today and to specifically address these new rules in your plan’s Investment Policy Statement or IPS.

The more conservative approach would be to amend the IPS to not allow MMF options that allow floating NAVs, “liquidation windows” and possibility of redemption fees. Many fund companies including Fidelity, Blackrock, Federated, and others have announced they will be making changes in some of their fund offerings.

If your plan still wants to allow the affected type of funds, we suggest a heightened degree of due diligence for those funds.

Document your Decision

Most importantly, whatever direction you take with your plan, the process needs to be documented and followed and the employees in your plan must be aware of the implications of whatever action you take in language that is free of jargon like “liquidation windows” “Floating NAVs” and “Redemption Fees.”

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