ERISA Plans Must Heed New Money Fund Rules, Lawyers Say

A Securities and Exchange Commission regulation designed to help prevent runs on U.S. money market mutual funds will require pension plan fiduciaries to evaluate such funds in a new light, attorneys said during a recent interview and webinar.

Bruce L. Ashton, partner with Drinker Biddle & Reath LLP in Los Angeles, said during a Sept. 29 webinar that the rules will require many pension plan fiduciaries under the Employee Retirement Income Security Act to not only consider which type of money market fund is most suitable for its needs but also evaluate whether the “hassle factor” in continuing to use money funds justifies a decision to switch to another cash equivalent alternative, such as a stable value fund. 

Peter E. Haller, partner with Willkie Farr & Gallagher LLP in New York, told Bloomberg BNA Sept. 30 that switching to stable value funds may not be needed for many plans, but that, in any event, each fund needs to consider the effect of the rules on the needs of the plan and on the characteristics, demographics and behavior of the plan's participant population.

Haller admitted, however, that the rules unleashed a number of potential administrative consequences that plan fiduciaries would need to consider—some of which will require SEC and/or Labor Department guidance—in dealing with the new requirements.

Under the complex rules (RIN 3235-AK61), money market funds will, for retirement plan purposes, generally be classified as either government, retail or prime institutional funds. Each fund classification will be subject to separate rules governing whether a fund is permitted or required during times of market stress to vary or “float” from the current money market fund's stable $1.00 price or net asset value (NAV). The floating NAV poses the potential loss of principal for fund investors from an investment that has historically been considered nearly risk free.

In addition, the rules permit, and in some cases require, funds to impose redemption fees based on a fund's liquidity level, and also permit funds to impose redemption gates under certain conditions, effectively allowing a fund to temporarily stop plan participants from redeeming fund shares during times of market stress. 

Three Fund Classifications

When the rule becomes effective on Oct. 14, 2016, government money market funds will be defined as any money market fund that invests 99.5 percent (currently 80 percent) or more of its total assets in cash, government securities and/or repurchase agreements that are collateralized solely by government securities or cash. 

Government funds will be attractive to plan sponsors seeking stability, liquidity and simplicity, but are likely to offer the lowest yield of the three classifications, Larry H. Goldbrum, senior vice president and director of Reliance Trust's ERISA fiduciary services team in Atlanta, said during the webinar sponsored jointly by his company and Drinker Biddle.

A retail money market fund will be defined as a fund that has policies and procedures reasonably designed to limit all beneficial owners of the fund to “natural persons.” Goldbrum said that, by natural person, the SEC was essentially limiting these funds to all those entitled to Social Security numbers. Consequently, defined benefit pension plans wouldn't be permitted to invest in retail funds, he added. 

Institutional prime money market funds are newly defined by the SEC as any fund that's not a government or retail fund. 

Excerpted from a story that ran in Pension & Benefits Daily (10/02/2015).

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