Money Market Funds Losing Favor

One year since the U.S. Securities and Exchange Commission (SEC)’s money market fund (MMF) reform rules went into effect, there has been “meaningful movement away from money market funds as a capital preservation option in defined contribution (DC) plans,” according to MetLife’s 2017 Stable Value Study, reporting that just over half (52%) of plan sponsors now offer money market as a capital preservation option, down from 62% in 2015.

Money market fund reform required providers to establish a floating net asset value (NAV) for institutional prime money market funds, which will allow the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets. The rule updates also provide nongovernment retail money market fund boards with new tools, known as liquidity fees and redemption gates, to address potential runs on fund assets.

MetLife found there has been growth in stable value funds, with 9% of sponsors adding them to their plans in the past two years. Among plan sponsors that are reasonably familiar with MMF reform, a clear majority (83%) feels that stable value is a more attractive capital preservation option for plan participants than are money market funds, as do nearly all DC plan advisers surveyed. Even among plan sponsors that are familiar with the rules and whose plans offer only a money market option, 55% think stable value is a better choice.

Despite recognizing the attractiveness of stable value, the study found that just under three in 10 plan sponsors overall (31%) evaluated their use of money market funds as their plan’s capital preservation option, in light of MMF reform. MetLife says this indicates a continuing need for education about the rule changes and the role stable value funds can play as the capital preservation option within DC plans.

Advisers yield a great deal of influence in plan sponsors’ selection of capital preservation options, with 67% of sponsors that offer money market saying their advisers recommended this option to them. However, there is a disconnect between the capital preservation recommendations advisers say they are providing and the actions that plan sponsors are taking. According to the findings, 90% of advisers report recommending stable value very often, but 86% say they seldom or never recommend money market funds.

Another factor affecting the adoption of stable value may be plan sponsors’ perceptions of its performance. Historically, stable value options have outperformed money market funds, with both higher yields and lower volatility, and have also outperformed inflation. However, just over half of plan sponsors (56%) are aware that stable value returns have outperformed money market returns over the past 15 years, while 84% did not know that stable value returns have exceeded inflation over that same period.