Most 401(k) plans offer a money market fund which may be the most popular fund in the plan. Traditionally a place to seek refuge when the markets become stormy, money market funds may be altered significantly as a result of Securities and Exchange Commission (SEC) reforms. Reform proposals have included the changes outlined below.
Moving to a variable Net Asset Value (NAV). This would be revolutionary since money market funds are currently viewed as capital preservation vehicles where plan participants can't lose any of their initial investment.
Redemption fees. Should participants wish to withdraw their balances too quickly after investing, money market fund managers may be given the right to impute redemption fees on departing participant balances.
Non-redemption periods. To help the portfolio managers more effectively manage the funds, there are proposals which essentially would lock up balances for short periods of time.
These potential changes provide retirement plan advisers with a wonderful opportunity to pro-actively help their clients. Although the reforms have yet to be finalized, it is likely that many of the changes outlined above will be implemented. As a result, you may wish to talk with your clients about the following solutions.
Offer a stable value or guaranteed fund. Consider exchanging an existing money market fund for a stable value or guaranteed fund. These funds will continue to offer non-variable NAV's where principal preservation is guaranteed.
Switch to a government money market fund. Although yields would be less than a money market fund, these investment options would also offer a stable NAV.
Investigate offering an ultra short-term bond fund instead. Investors in these funds could experience a loss of principal. However, yields would be higher than money market, stable value/guaranteed and government money market funds.
The comment period on the SEC's proposals ends soon with implementation of changes expected in early 2014. Be proactive in reaching out to your clients. Their 401(k) participants may hear about these proposals and become concerned. For many plan participants, their money market fund balance is the most important investment they have.
Contributing Editor Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. Mr. Lawton has over 25 years of experience working with corporations on their retirement plans and is a Chartered Retirement Plan Specialist (CRPS) and Accredited Investment Fiduciary (AIF). Mr. Lawton was named as a Top 100 Retirement Plan Adviser by PLANADVISER and a Top 300 Retirement Plan Adviser by 401(k) Wire. Mr. Lawton may be contacted at firstname.lastname@example.org or 414.828.4015.
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