Investing September 6, 2016

Prime Money Market Funds Set to Lose Assets

Money market fund reform is leading retirement plan sponsors to move to different cash strategies.
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A recent survey conducted StoneCastle throughout the end of July shows the potential for considerable additional flows of cash out of prime money market funds.

Money market fund reform from the Securities and Exchange Commission (SEC) requires 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 retail money market funds with new tools, known as liquidity fees and redemption gates, to address potential runs on fund assets. 

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Sixty-eight percent of survey respondents used prime funds as part of their cash strategy in their retirement plans, but 38% of these noted they will move entirely out of prime funds, and 24% will move a percentage. Only 8% do not plan to make additional re-allocation.

Of the respondents currently invested in prime funds, 21% expect to reallocate out of prime funds by the end of August, while a significant 45% plan to reallocate by the end of September. Underscoring the uncertainty that prime fund managers contend with, more than one-quarter of survey respondents needed to determine their cash strategy post reform.

Some industry experts believe retirement plan sponsors will switch to government money market funds. And, according to StoneCastle, so far government money market funds have been the primary recipients of cash leaving prime money market funds, and this trend is expected to persist.

Investors also indicated interest in other alternative products such as structured bank deposits and separately managed accounts. However, in an effort to attract prime fund flows, fund managers have also been launching ultra-short bond funds, and other cash alternatives like private and short maturity MMFs that investors are considering.

The survey was completed by 76 corporate treasurers from a wide array of sectors and company sizes.
Ask the Experts September 6, 2016

(b)lines Ask the Experts – Coverage Amount for Fiduciary Liability Insurance

“I know from a prior Ask the Experts column about the difference between a Fidelity Bond and Fiduciary liability coverage, but I had a question regarding the amount of coverage.
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“The prior Q&A mentioned that Fidelity Bond coverage is generally 10% of assets up to $500,000, but no corresponding required amount was listed for Fiduciary Liability coverage. Is there any required or recommended amount for coverage under a fiduciary liability insurance policy?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:  

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Good question! The short answer is there is no specific required/recommended amount under the Employee Retirement Income Security Act (ERISA) because, as the column indicates, there is no specific requirement under ERISA that retirement plans purchase a fiduciary liability insurance policy in the first place. However, as a practical matter, most  ERISA plan sponsors purchase such policies to protect their fiduciaries, since claims often exceed $1 million dollars (or even $10 million or $100 million for the largest plans) when the cost of defending the claim is factored in, and the liability for such claims is personal, not corporate.

What is an appropriate amount of fiduciary liability insurance for your plan? The answer will be based on plan size and other risk factors that come into play with the underwriting of any insurance policy. Your insurance professional who works with you on the policy can, and should, benchmark your coverage against other plans with similar size/risk characteristics to your plan, so that you can arrive at an appropriate amount of coverage. And such benchmarking should not be a one-time event; it should be completed that every policy renewal so that the amount of coverage can be adjusted as plan assets increase and other risk factors change.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.  

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to rmoore@assetinternational.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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