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The Case for MMFs in DC Plans – Or Not

As the retirement industry is fighting to keep money market funds in pension plans and the SEC considers reforms spurred by the Great Recession, others are questioning whether MMFs belong in DC plans at all. In comment letters to the SEC, pension executives argue that MMFs offer stability, liquidity and low cost, with half of DC and DB plans offering them as an investment option.

The concern is that retirement plans will have to invest in the proposed institutional MMFs — which would have a floating NAV, causing tracking problems on redemptions. They prefer to be able to invest in the proposed retail funds, which have a 2% early redemption fee if their liquidity drops below 15%.

Opponents of the MMF option argue that stable value funds, which enjoyed an estimated 200% greater return over the past 10 years, are a more appropriate option for capital preservation in pension plans. MMFs and SVFs are no longer popular as QDIAs, as they were before the safe harbor provisions of the 2006 Pension Protection Act allowed for TDFs and other managed equity investments.

But in a low-interest-rate environment, the question is whether MMFs are even an appropriate asset class for DC plans. Small plans, however, have limited or no access to SVFs, with many forced to choose the proprietary funds of their record keeper.

Also, some lawsuits (like the recent Lockheed decision, for example) have put plan sponsors in a tough position when the investments they offered achieved meager returns — which describes MMFs in today’s low-interest-rate environment.