Regulatory Change Brewing Beyond Fiduciary Rule

It’s been a big week for the Department of Labor’s effort to install a fiduciary rule update.

Nearly a full working week of hearings took place in Washington, D.C., at the headquarters of the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA), where experts dug deeply into the workings of the pending fiduciary rule update. Dozens of investment industry representatives took turns debating whether an expanded fiduciary rule would drive positive change in the way retirement plan service providers treat and disclose conflicts of interest.   

The marathon hearings closely followed arguments shared in formal comment letters submitted to EBSA during the months leading up to the forum. The course of the hearings showed many service providers are still apparently convinced the rule will not just be bad for business—they suggest it will also harm investors by eliminating cheaper, non-fiduciary forms of education and advice many people rely on.

It’s a critical debate for retirement plan service providers and plan sponsors, but fiduciary issues aren’t the only piece of rulemaking they should be concerned about. Beyond its own focus on fiduciary advice issues, the Securities and Exchange Commission (SEC) is in the process of implementing major money market fund reform provided for under rulemaking adopted in July 2014.

The SEC is concerned the money market fund reforms could catch some plan sponsors and advisers unawares, so they are more aggressively warning about the changes qualified retirement plans will have to make to accommodate the reforms. In short, the rule amendments require 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 non-government money market fund boards new tools, known as liquidity fees and redemption gates, to address potential runs on fund assets.  

NEXT: Money market reform warrants review

Chances are a given plan sponsor will be impacted by the money market reforms, with the PLANSPONSOR Defined Contribution Survey showing upwards of two-thirds of plans currently offer money market funds. While the SEC has said its rules will allow most plans to remain in retail money market funds, some are concerned the reforms could make this untenable from a fiduciary perspective, given the emergence of liquidity gates and fees.  

The new rules build upon earlier reforms adopted by the SEC, circa March 2010, that were designed to reduce the interest rate, credit and liquidity risks present within money market fund portfolios. The SEC says that, when it adopted the 2010 amendments, it soon after recognized that the recent financial crisis raised additional questions of whether more fundamental changes to money market funds might be warranted (see "SEC Analyzes Money Market Fund Reform").

At the time, SEC Chair Mary Jo White said the reforms would “fundamentally change the way that money market funds operate.” She suggested the changes, when they fully take effect in the fall of 2016, will “reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system.”

Many commentators agreed that the changes would give investors a better idea about which funds are weaker and which are stronger. As White suggested, “It’s a better way to facilitate transparency about which funds offer a better chance of not losing principal.” 

No rulemaking effort is without its critics, however, and the money market reforms are no exception. Before the rulemaking was made final, more than a dozen trade groups formally protested the reforms in a comment letter, highlighting concerns about how the reforms would interact with the fiduciary duty of plan sponsors.

They claimed the new requirements would cause administrative difficulties for retirement plan officials and fiduciaries. They also argued the rule changes would fundamentally alter the structure of money market funds, making them less desirable for retirement savers and the plans they participate in.

NEXT: Challenging process ahead 

The widespread use of money market funds among retirement plans and other institutional investors means industry providers should be paying attention, and should be gearing up to help guide plan sponsors and their own sales representatives through the 2016 implementation.

Two business leaders at Voya Financial tell PLANADVISER their firm is proactively preparing for the money market changes. According to Susan Viston, client portfolio manager, and Paula Smith, senior vice president for investment products-only business, Voya is actively talking with plan sponsors about what the reforms mean.

“Probably half of them are still trying to decide what their next move is going to be, based on the money market reforms,” the pair explains. “We foresee some people just staying put, but others are eyeing stable value more closely. Especially in the mid- to large-plan space, we’re seeing more interest in stable value again. It’s something service providers are paying increasing attention to.”

Months ago, the concerned industry groups warned that, despite a relatively long window provided for the reforms to take effect, as we near the fall of 2016, huge numbers of plan sponsors will all at once turn to reexamining their money market options in light of their fiduciary duty to plans and participants. The industry groups say they worry plan sponsors will feel compelled to replace their retail money market funds with government money market funds, which will not have liquidity fees or redemption gates. Again, the SEC has highlighted carve-outs in its rulemaking to prevent this outcome, but providers and fiduciary sponsors are being cautious.