The SEC is proposing changes to the regulation of funds, including requiring the funds to abandon the stable $1 net asset value (NAV) in favor of a floating value, as well as combining significant capital requirements with holdback restrictions on redemptions.
The requirements would cause administrative difficulties for retirement plan administrators and fiduciaries, the groups contended, and fundamentally alter the structure of money market funds, making them far less desirable for retirement savers and the plans they participate in.
If passed, defined benefit (DB) plan fiduciaries may exit money market funds that are subject to redemption holdbacks because the funds would no longer meet the plans’ needs for ready liquidity. Employee Retirement Income Security Act (ERISA) fiduciaries would be required to examine these changes in light of their fiduciary duty to plans and participants. The proposal under consideration would require that held back or restricted shares be used to make the fund whole if a fund cannot maintain its $1 NAV. Under ERISA, however, shares “held back” or restricted would continue to be considered ERISA plan assets. It is not clear that an ERISA fiduciary could allow the plan’s assets to be invested under these conditions consistent with regulatory requirements associated with the management of plan assets under ERISA.
Recordkeeping and administration complications could arise, the groups pointed out. Financial intermediaries are often responsible for the applicable recordkeeping, communications, tax reporting, and other operational and servicing functions associated with retirement plans. To implement floating values or redemption restrictions, intermediaries would need to change thousands of systems that support broker/dealers, banks, insurance companies, trusts, 401(k) recordkeepers, or other institutions tasked with processing money market fund transactions for their clients.
Any proposed redemption restriction would require significant operational changes and challenges for the recordkeeping of 401(k) plans. For example, participant distributions from money market investments could require two separate redemption checks (one for unrestricted shares, and a second for a restricted share balance following expiration of the holdback period), with attendant processing, mailing, and tax reporting associated with a plan distribution. Additionally, even if recordkeeping systems could be developed to implement redemption restrictions, the costs of doing so would be prohibitive.
Alternatives to money market funds are limited, according to the groups’ statement. If these major regulatory changes are put in place, employers would have few alternatives that can meet the needs of the plan and its participants—particularly the need for low-cost cash management—as effectively as money market funds.
Aside from easing retirement plan administration for both defined contribution (DC) and DB plans, the funds offer a conservative investment option for retirement savers, enable plan participants to diversify their investments and help retirement plans to meet liquidity needs.
The groups signing the letter include the American Benefits Council, the American Society of Pension Professionals and Actuaries, the ERISA Industry Committee, Financial Services Institute Inc., Plan Sponsor Council of America, the Securities Industry and Financial Markets Association, the Spark Institute and the U.S. Chamber of Commerce.