Enduring Investments

If you were asked to describe the retirement plan industry landscape of 2018, what might it look like? One’s crystal ball is sure to include investments that we have not yet seen, designed or even conceived of but most likely packaged in structures that have been around for ages, like the mutual fund and the separate account. Maybe by then the exchange-traded fund (ETF) landscape will be even larger or, possibly, extinct. Making five-year projections in an industry that changes as rapidly as this one is a recipe for being incorrect. It is risky business. 

At the onset of 2012, would many among us have envisioned the need for a wholesale rework, restructure and replacement of the time-tested traditional $2.5 trillion money market fund industry?

Preventing a Run 

Regulators and legislators have decided that something must be done to shore up the industry. The Financial Stability Oversight Council, a body created as a result of the Dodd-Frank Act, has been a proponent of capital-buffers and withdrawal limits.

It is easy to cite the safeguards and enhancements that could make the money market investments more appealing and more efficient than they are today. In the eyes of the retirement plan adviser, money market funds are a hybrid between an asset class and a safe-haven holding structure.  

Could they more favorably compensate the investor? Sure. Could money markets yield more? In an efficient market scenario, where a large number of managers are chasing yield among a finite number of securities, all within the confines of maturity and liquidity restrictions—probably not. When all managers are looking for the same thing, that being higher yield and safer investments, the market itself winds up dictating the yield. In fact, one can view yields on regular intervals and recognize that these funds operate and perform within a narrow band of returns.

All-Encompassing Money Funds

Virtually all advisers use money market funds. Most of us are using them, in some capacity, in every retirement plan we service. Even if you think that you are not, you, or the third-party administrator (TPA) or someone in the chain of custody for the assets you manage is using the structure. It is easy, liquid and convenient, has a low reading on the risk meter and is efficient. It keeps the plan participant fully invested—in something!

Without the money market fund, what would happen to cash investments? Would the adviser use a short-term-bond fund? Would you perform a credit-quality analysis or calculate the duration of the portfolio you were intending to place client funds into for only three days? Would an adviser need to contact the custodian after a specific amount of cash builds up within a defined benefit (DB) plan, and then make a short-term investment decision with long-term money?  

Consider the End Users

Currently, it appears as though the rule-making bodies are designing a money market industry fix that fails to take into consideration the users, the investors and the viability of the existing system. Everything can be washed away with a D.C.-oriented sound bite that goes something like, “We are working to make the financial markets safer for the investor. After this is passed, no retiree will ever need to [lie] awake at night worrying about the safety of their investment.”   

Advisers know the absurdity of such a statement. It is not the regulation that keeps plan participants from lying awake at night. It is not the legislation, either. It is not the instruments being used in the portfolio, nor is it the verbiage in the prospectus or the name of the company.

It is the retirement plan adviser who makes the difference. It is the adviser who does everything in his or her power to be on top of every investment vehicle being offered and every asset structure offered to participants. Advisers cannot afford to relinquish the flexibility and liquidity that money market instruments offer.

Steff C. Chalk is CEO of the Fiduciary Consulting Group, a fee-only fiduciary consulting practice ­serving corporations and nonprofits. A judge for the PLANSPONSOR Retirement ­Plan Adviser of the Year award and a faculty member of the PLANSPONSOR Institute, he is also the ­co-author of “How to Build a Successful 401(k) and Retirement Plan Advisory Business.”