The post–Financial Crisis market celebrated seven years of the bulls running equity markets higher in March, and yet there are still moments when the scars of the Great Recession float to the surface. Take, for example, the exclamations from talking heads during early 2016’s market volatility that we were entering another crisis. However, equity markets ended up closing the quarter roughly flat.
Market pundits and their hyperboles aside, what I find striking is the tone that a post–financial crisis world has taken. Politicians pound their podiums to espouse the evils of Wall Street, and more and more regulations keep channeling down the pike (some much needed). Top of mind at the moment, as its October deadline looms, is the money market reform rules.
Rooted in the financial crisis when Lehman Brothers collapsed and the Reserve Primary Fund “broke the buck,” the updated rules are intended to increase transparency and strengthen the money market sector. The rules allow funds to impose a liquidity fee or temporarily suspend redemptions during times of extreme volatility by way of a redemption gate. However, there are a number of types of money market investment options, and the rule affects each differently — some, for example, don’t have the liquidity fee. Plan sponsors now have a duty to analyze their money market and other capital preservation positions in an effort to ensure compliance.
A clear understanding
Plan sponsors may naturally seek a money market strategy that does not have the liquidity fee or redemption gates, but the onus is on them to clearly understand what the strategy can and cannot do. Plan sponsors are also responsible for disclosing any liquidity fees and redemption gates to participants. This, unfortunately, adds another level of complication to already complex plan investment lineups.
A money market instrument was probably considered one of the easier investments to understand. Not anymore. These new rules and their nuances must now be expressed to participants, which may only add to the distrust and negativity — not to mention confusion — directed at investing in the post–financial crisis environment. I worry about the effect this may have on participant inertia, understanding and retirement readiness. Every action has a reaction, after all. If plan sponsors elect to keep a money market instrument in their plan, will the added details result in a negative participant experience?
What’s a plan sponsor to do? Now is the time to review the capital preservation option in investment lineups, understand the nuances of the holdings, review alternatives and make changes as needed. October is looming, and with proper review, there’s ample time to make a decision that will best serve a plan and participants. Consider it an exercise in retirement plan spring cleaning in a post–financial crisis world.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does adviser assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
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