Money Market Reform and Workplace Savings Plans:

Transcription

1 Money Market Reform and Workplace Savings Plans: A plan sponsor guide to what s ahead Last summer, the Securities and Exchange Commission U.S. Treasury and government ( SEC ) announced significant regulatory changes for money market funds are money market mutual funds an important component not subject to the structural of plan offerings in the workplace savings industry. changes. Retirement plan offerings commonly include three types of money market mutual funds: U.S. Treasury, government, and prime (or general purpose ). The impact of the new regulations varies, depending on fund type. For example, U.S. Treasury and government money market funds are not subject to the structural changes. As a result, these funds will largely remain the same as they are today, meaning that: (1) they will continue to be eligible to offer a stable net asset value ( NAV ); and (2) they are not subject to redemption restrictions. The new money market fund rules, which apply to the underlying fund offerings and not to the plans themselves, create new definitions for government funds and retail prime funds, and require institutional prime funds to price and transact at a floating NAV. The new rules also permit prime money market mutual funds with unusually low weekly liquidity to charge shareholders liquidity fees, payable to the fund upon redemption, as well as impose redemption gates that would halt all withdrawals. The changes to the funds are required to be fully in place by October 2016, but work to implement them has already begun at Fidelity and across the industry. We urge plan sponsors to begin reviewing and asking questions about their plan lineup now, so that they may determine the types of money market mutual funds that will be right for their plan and participants in this new regulatory environment. The three types of taxable money market mutual funds: U.S. Treasury Government Prime (general purpose)

2 Key Takeaways: Money market mutual fund regulation changed significantly this summer. This reform affects the money market mutual funds within retirement plans, and not the plans themselves. U.S. Treasury and government money market mutual funds are exempt from the structural aspects of the 2014 money market regulatory changes. All prime (and municipal) money market mutual funds will be subject to redemption restrictions that could hinder distributions, exchanges, rebalancing, loans, and a number of other retirement plan recordkeeping functions. Additionally, prime funds categorized as institutional will have a floating net asset value. Despite an implementation date of October 2016, we urge retirement plan sponsors to start asking questions now about the impact of the regulatory reform on their plan lineup. Details and Practical Realities Government money market mutual funds Despite their exemption from structual reform, U.S. Treasury and government funds did incur a definitional change. Government funds will be required to invest 99.5% of their assets in government securities, under the new rules. Fidelity has managed its government money market mutual funds in this manner for many years. Prime money market mutual funds Retail is a prime fund that has policies and procedures reasonably designed The new rules will subject prime money market mutual funds to limit all beneficial owners of the fund to structural changes. Currently, prime funds can invest in any to natural persons or human beings. securities within the money market universe, i.e., securities that are of the highest credit quality and mature within 397 days. In addition to investing in government securities, prime funds can invest in commercial paper and bank instruments. The specific changes that apply to prime funds will depend on the fund s categorization as retail or institutional. Retail and institutional are familiar industry terms. However, in today s environment they are primarily used by fund firms to self-classify funds. The new definition of retail from the SEC is a prime fund that has policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons or human beings. An institutional fund, on the other hand, can be offered to many different kinds of investors, including small businesses or large corporations as well as to those qualified to invest in retail funds. While an individual can invest in an institutional fund, the fund will likely be owned primarily by institutional, corporate-type investors. 2

3 The SEC was clear that defined contribution plan investors fit the retail definition, meaning that 401(k), 403(b), and 457 plan participants can invest in retail prime funds. That is important because these two types of funds will be treated differently under the new rules. Retail funds will be able to continue to offer a stable $1.00 NAV, whereas institutional funds, such as those held by defined benefit plans, will be required to have a floating NAV. A floating NAV means that a fund will be required to transact and price its shares out to 1/100th of a penny, or $1.0000, instead of two decimal places ($1.00). Four-decimal-place precision can force small changes in value that may result in gains and losses that two-decimal-place pricing would not produce. Redemption restrictions: liquidity fees Regulators believe that it is important for a fund to be able to impose a fee All prime funds, whether retail or institutional, will be subject to to discourage redemptions if the fund redemption restrictions once the new rules are implemented, reaches a certain level of stress. which may occur in rare circumstances. There are two kinds of restrictions: (1) liquidity fees and (2) redemption gates. Regulators believe that it is important for a fund to be able to impose a fee to discourage redemptions if the fund reaches a certain level of stress. A prime fund may impose a liquidity fee under two conditions, both of which are based on a fund s level of weekly liquid assets defined as securities that can be converted to cash within seven days. 1 Current rules require money market mutual funds to invest 30% of a fund in weekly liquid assets. If the fund s weekly liquid assets were to fall below 30% under the new rules, the fund s board of directors has the ability to impose a fee of up to 2% on all redemptions. The fee would be paid to the fund, giving investors 98% of the proceeds they redeemed. The board has the discretion to impose a fee of less than 2%, or even no fee at all, if it considers that to be in the best interest of the fund. The fee, however, cannot exceed 2%. The second condition is activated if a fund s weekly liquid assets were to fall below 10%. Under that scenario, the board is required to impose a fee of 1%. The board again can decide to have a lesser or greater fee or no fee at all, if it considers that to be in the fund s best interest. Four-decimal-place precision can force small changes in value that may result in gains and losses that two-decimal-place pricing would not produce. Retail funds will offer a stable $1.00 NAV A floating NAV will have 4 decimal places $ NAV 3

4 Redemption restrictions: redemption gates The second redemption restriction created by the new regulations is a redemption gate. Once the new rules are implemented, all prime funds, retail or institutional, may also impose a gate, or a halt on all redemptions, in rare circumstances. Under the new regulations, a fund may impose a gate for up to 10 days if weekly liquid assets were to fall below 30%. This means that a fund would reject all redemptions for that period of time. Here, too, the fund board has discretion as to whether or not to impose a gate. If a gate is ultimately imposed, the fund board may remove it when it decides the gate is not in the best interest of the fund. The imposition of a gate on a prime money market fund could hinder distributions, exchanges, rebalancing, loans, and a number of other retirement plan recordkeeping functions. Exempt from SEC structural change U.S. Treasury and government funds Exposed to SEC structural change Prime (general purpose) funds Treasury only Treasury Government Retail funds Institutional funds Eligible to transact at stable net asset value (NAV) Eligible to transact at stable NAV Must transact at floating NAV Available to all types of investors Available to individuals (including via DC plans) Available to organizations and individuals No liquidity fees/redemption gates Subject to liquidity fee/redemption gate based on fund liquidity level 4

5 Your Workplace Questions Answered by Our Professionals Q I have a money market fund in my plan; do I need to take any steps immediately? A No, however, the most important thing you can do as plan fiduciary is to convene a meeting with your plan s Investment Committee to understand the new required reform features of certain money market mutual funds, and determine the type of money market fund you will want to offer in the future. Even though the SEC s implementation date for money market mutual funds is not until October 2016, it may take some time to determine what changes, if any, you would like to make. You may want to ask some of the following questions: Will we want to offer a prime fund when redemptions could potentially be charged a fee, or halted temporarily? If the answer is yes, would it be a retail prime fund offering a stable NAV, or an institutional fund with a floating NAV? Is it appropriate to have a government money market mutual fund, because government funds are exempt from the SEC s structural changes? What plan governance actions are needed if our Investment Committee decides to implement a change? How much time will be needed to consider the options, and implement the necessary changes? Q What if I am not sure about the type of money market fund my plan currently holds, and what type of fund it may be once it conforms to the new SEC regulations? A Fidelity-managed government and U.S. Treasury money market mutual funds include the terms government or Treasury in their fund names. If you are not certain, simply contact your Managing Director or other Fidelity plan representative who can help you determine the classification of your current money market fund. We are able today to help you evaluate the type of money market fund your plan may wish to offer once the new SEC rules are implemented, and we expect to communicate potential Fidelity product lineup changes over time. Q We have a Fidelity Freedom Fund in our plan, or a unitized stock or stable value account that invests in a money market fund. What happens then? A In a situation where a prime money market mutual fund is utilized within another fund as a source of liquidity, i.e., in a fund-of-funds, or a unitized stock or stable value account, the question is whether the characterization of the underlying money market fund could affect the entire fund. It could, and thus the potential for fees and more importantly a halt or redemption gate being placed on the liquidity component will be a new consideration for those who select the underlying investments for these types of products. 5

6 Q Our investment lineup includes non-fidelity money market funds. How do I obtain information on the status of those funds? A You can certainly contact your Managing Director or other representative. It is important to understand that decisions regarding those non-fidelity funds are the responsibility of the board of directors and shareholders of those non-fidelity money market funds. Q What effect will the reforms have on money market funds held in non-qualified plans? A Some plan sponsors support a non-qualified plan through the execution of what is known as a rabbi trust. Although these types of trusts are funded, they are considered to be unfunded from an IRS perspective. The key question is whether a rabbi trust will be qualified to invest in a retail money market mutual fund, i.e., a fund that limits investors to natural persons. Fidelity is working with other firms to seek clarity on this and other questions from regulators. Q Money market reform was an initiative of the SEC. How do the SEC-mandated changes affect my responsibilities as a fiduciary under ERISA? A Although SEC regulators conferred with the Department of Labor ( DOL ) regulators, it is still advisable to receive additional confirmation from the DOL with regard to a number of issues. For example, many plan sponsors use a money market fund to fulfill their obligations under Section 404(c) of ERISA to provide three different investment options from a risk and return perspective in exchange for fiduciary protection against participant investment losses. Fidelity is working with a number of trade groups and associations to gain additional clarity on this question as well as a number of other technical issues under ERISA. Q If our plan determines that it will make a change to the current money market fund in my investment lineup, is there a deadline? A No. We will continue to keep you updated about developments with money market mutual funds through the Fidelity Forum and our conference call series which will continue in We are happy to provide input to your plan governance due diligence and review process at any time. Once it is complete, you should contact your Fidelity representative for more information and next steps to help us accommodate your timing. Q If our plan determines that we will make a change to the current money market fund in my investment lineup, is there a responsibility to notify plan participants of the changes that are taking place? A As with any other change to your investment lineup, plan sponsors will have a responsibility to notify plan participants of the new money market offering. Additional money market mutual fund resources are available at 6

7 Money Market Glossary of Terms Floating NAV money market mutual fund: A prime (or municipal) money market mutual fund will price and transact its shares out to four digits ($1.0000) once the SEC s new regulations are implemented. Shareholders in a floating NAV money market mutual fund may experience a gain or loss if the per-share value of the fund changes by 1/100th of a penny (also known as a basis point). For example, if a shareholder owned 10,000 shares priced at $1.0000, a 1 basis point change in a floating NAV fund would result in a gain or loss of $1.00. Government money market mutual fund: Under the new rules, a money market mutual fund that invests 99.5% of its total assets in cash, securities issued by the U.S. Treasury and U.S. government agencies, or repurchase agreements collateralized by government securities. A government money market mutual fund is eligible to price and transact using a stable $1.00 NAV, and is not subject to liquidity fees and redemption gates. A U.S. Treasury and U.S. Treasury Only money market mutual fund will fall under this definition. Institutional money market mutual fund: A prime (or municipal) money market mutual fund that will not qualify as a retail money market mutual fund, under the new rules. An institutional fund will not limit shareholders to beneficial ownership by natural persons (i.e., individuals, or human beings). Institutional fund shareholders may include individuals, small businesses, or large corporations. Municipal money market mutual fund: A money market mutual fund that invests primarily in securities issued by state and local governments, colleges, hospitals, universities, and other nonprofit entities, and that seeks to generate tax-exempt income. A municipal fund does not fall under the government fund definition. Prime money market mutual fund (general purpose): A money market mutual fund that invests primarily in any eligible high-quality money market instrument as defined by SEC regulations, including U.S. government securities, commercial paper, certificates of deposit, corporate notes, and other debt investments. A prime money market mutual fund is also known as a general purpose money market mutual fund. Retail money market mutual fund: A money market mutual fund that will have policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons under the new rules. Stable NAV money market mutual fund: A money market mutual fund that seeks to maintain a constant $1.00 NAV. U.S. Treasury money market mutual fund: A money market mutual fund that invests in cash, U.S. Treasury securities, or repurchase agreements collateralized by U.S. Treasury securities. Because a U.S. Treasury fund will qualify as a government money market mutual fund, a U.S. Treasury money market mutual fund is eligible to price and transact using a stable $1.00 NAV, and is not subject to liquidity fees and redemption gates. U.S. Treasury Only money market mutual fund: A money market mutual fund that invests only in direct obligations of the U.S. Treasury. Because a U.S. Treasury Only fund will qualify as a government money market mutual fund, a U.S. Treasury Only money market mutual fund is eligible to price and transact using a stable $1.00 NAV and is not subject to liquidity fees and redemption gates. 7

8 1 The following types of money market mutual fund assets satisfy SEC requirements for weekly liquid assets: cash, direct obligations of the U.S. government, securities that will mature or are subject to a demand feature that is exercisable and payable within five business days, receivables scheduled to be paid within five business days and government agency discount notes with remaining maturities of 60 days or less. For plan sponsor and investment professional use only. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation. Before investing, consider the funds investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI FMR LLC. All rights reserved