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NOW: The new U.S. Securities and Exchange Commission (SEC) rules took effect in October, and Jacobson says they have led many sponsors to make a change. “Most plans, at least the larger ones, were using institutional money market funds. Those funds are now subject to a floating NAV [net asset value]” so now get priced based on market value and, theoretically, face future volatility.
“Institutional funds are also now subject to ‘gates’ and ‘fees,’” she says. “This means that if there is a run on money market funds, the funds can impose gates—rules that say investors may not sell their shares in the fund for a period of time—or fees, meaning that the fund can say that when you sell your shares, you’ll get a haircut off the balance of your account.”
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She says many sponsors evaluating a change this year considered moving to a retail money market fund—doing so eliminates the floating NAV issue but can impose those redemption gates and fees. Another option has been to switch to a government money market fund; those have a stable NAV, and Jacobson knows of none that implement gates and fees.
In the current interest rate environment, with rates inevitably rising at some undetermined future time, many sponsors do not want participants to, potentially, have trouble getting out of a money market fund, Jacobson says. “Most sponsors moved to a government fund because of the perceived risk of gates and fees,” she says.
Droblyen also has seen plans switch from a money market fund to a stable value fund, for the higher returns. “Although there is not much difference in the yield right now, that could change as interest rates rise,” he says.