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The Time to Act on MMF Reform is Now

The SEC’s new money market fund rules don’t take effect until October, but now is the time that advisors should be sitting down with clients to explain the rules and how they will impact retirement plans, recommends a feature article in the latest issue of NAPA Net the Magazine.

It’s widely expected that the new rules will result in fund companies changing their fund offerings, including:

  • Money market funds with both institutional and natural person holders may spin off institutional holders into a separate floating NAV fund.

  • Some institutional funds may liquidate or merge into other funds.

  • To avoid having a floating NAV and having to comply with the liquidity fee and gate rules some prime money market funds may change investment strategies to operate as a government money market fund.

Additionally, since existing money market funds may reorganize into two separate funds — one for retail investors with a stable price, and another for institutional investors with a floating NAV — this could mean higher fees for the separate funds than under the combined funds. Plan fiduciaries will need to carefully monitor money market expenses in the upcoming year, says Bruce Ashton, a partner with the Los Angeles law firm of Drinker Biddle & Reath LLP.

The new fees could cause other problems. For example, it’s been suggested that the possibility of a fee or gate could violate QDIA rules. The SEC has stated that plans can avoid the issue by having the plan sponsors pay the fee for participants or lending the plan money. Since this is likely to be something sponsors will not want to do, fiduciaries may want to consider using another investment for the QDIA.

Also, current IRA rollover rules require that an IRA owner must be able to transfer funds to another investment within a reasonable period of time and without any penalty. So a plan that currently rolls over accounts into money market funds automatically may want to reconsider. The SEC says a 10-day gate is a “reasonable” period of time, but the DOL indicates that additional steps need to be taken if a liquidity fee is imposed. Again, the SEC has suggested that plan sponsors could avoid the issue by assuming the payment of the fee.

Other issues arise if a money market fund is a plan investment option and the participant has to get a minimum or mandatory distribution, or a refund has to be processed in a timely manner. Again, the SEC has suggested solutions that may not be acceptable to sponsors.

The fees and gates will also have to be explained to participants in the plan’s summary plan description, says attorney David Levine of Groom Law Group. It shouldn’t be a problem to address the issues, he says; they just need to be disclosed.

Advisors should review their contracts with plan sponsors, and perhaps seek modifications. Many advisory contracts, explains Ashton, provide that advisors don’t advise on money market funds and don’t receive fees for doing so. So to the extent that an advisor reviews and recommends money market funds, they may need to change their service arrangements, he says. Any such change, he adds, must comply with the ERISA 408(b)(2) rules requiring the advisor to disclose fee changes. Another rule to not run afoul of when setting up a new compensation arrangement is to make sure levels of compensation are not different, he says. Advisors may want to set it up as a separate service with a fixed fee, he says.

Advisors and fiduciaries have a fair amount of homework to do, says Levine, including getting information from current money market providers detailing what they are going to do to comply with the new rules, and what type of fund it will be going forward. With that information the advisor and plan fiduciaries will need to assess whether or not what will happen is appropriate for their plan. If the fund will be transformed into a government plan, he says, then everything may go forward as normal. If the fund will have liquidity fees, gates or a floating NAV, then fiduciaries have to assess if the fund is still prudent for the plan, or if other options need to be evaluated.

Advisors and their clients should not rush the analysis, says Levine. “Don’t act hastily,” he says, “but go through the review thoroughly, then make recommendations.”

Advisers will also need to make sure the record keeper can accommodate the changes, says Ashton, especially the capability to get information to participants if the fund imposes fees or gates. If the plan makes a decision that going forward they will only have governmental funds, says Ashton, then they will have no worries. But if the plan has retail or institutional funds, then record keepers will have to be able to get the information out literally overnight, he says.

To view the feature article by freelance writer Elayne R. Demby, click here. And to view a pdf of the full 52-page issue, click here.