“Depending on the approach taken by the SEC, the impact on retirement plans and their participants may be significantly detrimental and could result in the limited availability, or elimination, of money market funds from such plans,” said Larry Goldbrum, general counsel of The SPARK Institute.
The letter points out that the floating net asset value (NAV) alternative is generally administratively and operationally feasible for retirement plan service providers; however, making the transition to floating NAV money market funds, as well as other changes that will be necessary, will involve costs and complexities.
The letter also raises concerns and makes recommendations regarding the retail funds exception to the floating NAV requirement. Goldbrum commented that, “Although the exception has some conceptual merit and may appeal to some plans and service providers, in the absence of certain changes, it is unlikely that service providers will make such funds available through their investment platforms and systems.” The SPARK Institute recommended that the SEC modify the retail funds daily redemption limitation so that it does not apply to: (1) any redemption request made by a participant in connection with an account held in a participant-directed tax-exempt retirement plan; and (2) any redemption request made by the plan sponsor in connection with removing a money market fund from a participant-directed tax-exempt retirement plan’s investment options, with mutually acceptable advance notice.
The letter contends retirement plans do not pose the types of threats the SEC is attempting to address. According to data collected by The SPARK Institute from companies that provide recordkeeping services to approximately 32.3 million plan participants, only 1,536 (0.00005 or 0.005%) of all such individuals held more than $1 million in a single money market fund as of June 30, 2013.
More serious concerns were raised about the standby liquidity fees and gates alternative, which would allow money market funds to maintain a stable NAV under normal conditions but require a fund to impose a redemption fee the following business day if its liquidity falls below a certain threshold and also permit the fund to impose a “gate” for a period of time (i.e., suspend all redemptions). “Most retirement plan service providers’ systems are not capable of being adjusted overnight with respect to an individual fund in order to impose redemption fees or restrict redemptions when the fund falls below required liquidity levels on a given business day, and then immediately remove such restrictions when fund liquidity levels recover,” said Goldbrum. “Plan service providers will be unable and unwilling to accept such responsibility and risk with respect to the funds.”
The letter also raises serious concerns about the possibility of a combined alternative. “The combined alternative includes the problematic requirements and limitations from both of the two others, and would be the most difficult and costly for plan service providers to support,” Goldbrum commented. “Retirement plans will likely only have government funds available for use if the combined alternative is adopted.” The comment letter urged the SEC not to adopt this approach.
In its comment letter, the Investment Company Institute (ICI) expressed opposition to floating the NAV for any category of money market funds (see “ICI Comments on SEC Proposal for Money Market Funds”). In June, the SEC voted to propose rules that would reform the way money market funds operate and make them less susceptible to runs that could harm investors (see “SEC to Propose Money Market Fund Reform”).
The letter is available on The SPARK Institute’s website at www.sparkinstitute.org/comments-and-materials.php.