Money Market Reform and Workplace Savings Plans:

Transcription

1 Money Market Reform and Workplace Savings Plans: Implementing the SEC Reforms in 2016 The New Money Market Mutual Fund Rules The Securities and Exchange Commission ( SEC ) significantly changed the regulation of money market mutual funds ( MMMFs ) in 2014 to strengthen investor protections during extreme markets. The SEC s MMMF changes have a two-year implementation period with a compliance deadline of October 14, As of April 2016, MMMF web pages will begin to display new data for investors showing current and historical fund liquidity, along with other metrics. The regulatory changes do not affect all MMMFs in the same way. For example, U.S. Treasury and government MMMFs (referred to collectively as government funds ) are exempt from structural changes under the new rules and can continue to operate in much the same fashion as before. Government MMMFs will continue to be eligible to offer a stable net asset value ( NAV ) to both individual and institutional investors, and not be subject to redemption restrictions. Non-government MMMFs (prime or general purpose and municipal funds) are treated differently under the new rules. Any prime or municipal MMMF categorized as institutional must utilize a floating NAV. If weekly liquidity for non-government MMMFs falls below regulatory limits, then these funds are subject to potential redemption fees, or to temporary gates that could interrupt the processing of common retirement transactions such as withdrawals, contributions, exchanges, and loans. New MMMF data for investors showing current and historical fund liquidity and other metrics will be online by April 2016.

2 Retail prime MMMFs will be eligible to offer a stable NAV, but they, too, are subject to potential redemption fees or to temporary gates if weekly liquidity measures fall below regulatory limits. The following chart outlines the new SEC rules governing the operation of MMMFs: Exhibit 1. New MMMF Rules after October 14, 2016 Type of Money Market Mutual Fund (MMMF) U.S. Treasury/Government Investing at least 99.5% of assets in cash, government securities, and/or repurchase agreements that are fully collateralized with government securities Retail Prime (General Purpose) & Municipal Retail funds limit shareholders to beneficial ownership by natural persons (individuals). See Exhibits 2 3 for more detail. Institutional Prime (General Purpose) & Municipal Institutional funds are open to any shareholders, including individuals, small businesses, and large corporations Net Asset Value (NAV) Stable NAV ($1.00) Stable NAV ($1.00) Floating NAV (e.g., $1.0000) Liquidity Fees/Redemption Gates Not Applicable Liquidity Fee If a fund s weekly liquid assets were to fall below 30%, the fund s board may impose a 2% fee on redemptions If a fund s weekly liquid assets were to fall below 10%, redemptions will be subject to a 1% fee, unless the fund s board determines otherwise Redemption Gate If a fund s weekly liquid assets were to fall below 30%, the fund s board may suspend redemptions for up to 10 days 2

3 The Difference between Retail and Institutional MMMFs The SEC defines a retail MMMF as a prime (or municipal) fund that has policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons or human beings. Alternatively, an institutional fund is available to many different kinds of investors, including small businesses or large corporations as well as to those who may invest in retail funds. The following chart will help you better understand the SEC and Fidelity s approach to designating types of account holders and accounts. Most workplace savings plans will be eligible to invest in retail MMMFs. Exhibit 2. Fidelity s Categorization of MMMF Retail and Institutional Investor Accounts Examples of Types of Retail Accounts Natural persons represent the beneficial ownership interest of these accounts Individual accounts Defined contribution plans College savings plans Health savings plans Ordinary revocable trusts Accounts sold through intermediaries when the underlying beneficial owner is a natural person Insurance company separate accounts beneficially owned by a natural person who has direct investment power Charitable gift accounts beneficially owned by a natural person who has direct investment power Examples of Types of Institutional Accounts Natural persons do not represent the beneficial ownership interest of these accounts Accounts with registrations based on a tax identification number when the beneficiary is not a natural person Non-qualified plans funded via Rabbi trusts Small business accounts Defined benefit plans Ordinary irrevocable trusts that do not have a natural person as a trustee Endowments Our Recordkeeping Approach To gain better insight into the MMMF fund actions that workplace plan sponsors planned to make because of the new SEC regulations, Fidelity surveyed over 600 clients in Spring Nearly two-thirds of those surveyed said that they would change their plan lineup to offer only government MMMFs prior to October 2016 in order to avoid potential fees and gates or the imposition of a floating NAV. Another 15% stated that they would maintain prime MMMFs, alone or in combination with government/u.s. Treasury funds. Fidelity is committed to the continuation and ongoing support of both retail and institutional prime MMMFs on our recordkeeping platform after the implementation of the new SEC rules. We understand that not every plan has the same investment objectives or risk tolerance, resulting in the need for flexibility and choice when selecting a MMMF. There may, however, be instances in which the new rules limit the availability of prime MMMFs. A redemption gate, if imposed, could hinder distributions, exchanges, rebalancing, loans, and a number of other retirement plan recordkeeping functions. If a prime MMMF is held in the plan, the selection of a government MMMF as a contingency fund (exempt from fees and gates) could avoid interruptions in service to your participants. 3

4 Here is a chart that details Fidelity s recommended practices as of February 1, Exhibit 3. MMMF Options for Fidelity Workplace Retirement Plans and Accounts Types of money market mutual funds in which plans/accounts may invest ACCOUNT TYPES Defined contribution plans (including section 403(b) and 457 programs) Non-assetized non-qualified plans Strategy and third-party trustee accounts Retiree Medical Account (Retiree Health Reimbursement Account) MMMF used to capture revenue credits SDB default fund for asset transfers from a self-directed brokerage account to the plan Forfeiture account Liquidity component for FMTC custom products (stable value, unitized stock, certain strategy funds where MMMF is used for liquidity) Defined benefit plans Non-qualified plans funded via Rabbi trusts Beneficiary Distribution Account in an irrevocable trust with an institutional registration U.S. TREASURY AND GOVERNMENT Treasury Only, Treasury, Government PRIME (GENERAL PURPOSE) Retail Institutional Preferred Fidelity Money Market Mutual Funds During 2015, Fidelity made changes to its MMMFs in response to the SEC s new rules. For taxable funds available to workplace retirement plans, this included the conversion of the investment mandate for certain funds from prime to government. In early December, Fidelity Retirement (FRTXX) became Fidelity Retirement Government II, and Fidelity Cash Reserves (FDRXX) became Fidelity Government Cash Reserves (with no change in symbol or fund number). Additionally, Fidelity U.S. Government Reserves (FGRXX) and Select Money Market (FSLXX) merged into the Premium classes of Fidelity Government and Fidelity Money Market funds. Fidelity Treasury was introduced in place of Fidelity Treasury Money Market (FLTXX). And, finally, the Daily Money Class of Fidelity Prime Fund (FDAXX) merged into Fidelity Government Daily Money Class. 4

5 For those situations when a retirement plan sponsor prefers a prime fund, but is ineligible to use a retail prime fund for any reason, Fidelity has designated the FIMM: Prime Portfolio as an institutional fund for specifically that purpose. All of Fidelity s U.S. Treasury and government MMMFs comply with the SEC s requirements for government funds. They are eligible to continue transacting at the traditional $1.00 stable NAV for both individual and institutional investors, and will not be subject to liquidity fees or redemption gates. Exhibit 4 details the lineup of Fidelity taxable MMMFs available for recordkept retirement plans. Exhibit 4. Fidelity Taxable MMMFs for Recordkept Retirement Plans Government Funds Prime Funds Fund # Ticker Government Funds Fidelity Money Market Trust Retirement Government Money Market II Portfolio 630 FRTXX Fidelity Money Market Trust Retirement Government Money Market Portfolio 631 FGMXX Fidelity Government Cash Reserves 55 FDRXX Fidelity Government Money Market Fund* 458 SPAXX Fidelity Government Money Market Fund Premium Class 2741 FZCXX FIMM: Government Portfolio Class I^ 57 FIGXX FIMM: Government Portfolio Institutional Class^ 2642 FRGXX U.S. Treasury Funds Fidelity Treasury Money Market Fund** 2742 FZFXX Fidelity Treasury Only Money Market Fund 415 FDLXX FIMM: Treasury Portfolio Class I^ 695 FISXX FIMM: Treasury Portfolio Institutional Class^ 2644 FRBXX FIMM: Treasury Only Portfolio Class I^ 680 FSIXX FIMM: Treasury Only Portfolio Institutional Class^ 2643 FRSXX Retail Prime Funds Fidelity Money Market Fund 454 SPRXX Fidelity Money Market Fund Premium Class 2738 FZDXX FIMM: Money Market Portfolio Class I^ 59 FMPXX FIMM: Money Market Portfolio Institutional Class^ 2013 FNSXX Institutional Prime Funds FIMM: Prime Money Market Portfolio Class I^ 690 FIDXX FIMM: Prime Money Market Portfolio Institutional Class^ 2014 FIPXX *Fidelity Government for advisors: Daily Money Class #2740, FZBXX **Fidelity Treasury for advisors: Daily Money Class #58, FDUXX; Advisor C Class #529, FDCXX ^Consult your relationship manager for information on these funds 5

6 Our Shared Implementation Timeline What You Can Expect as a Plan Sponsor Here are the important deadlines that relate to our implementation of the new rules. January 2016 October 2015 Fidelity announces its retail and institutional MMMF lineup Fidelity closes retail prime and municipal MMMFs to new institutional investors Plan Sponsors with an institutional account holding a retail prime fund are asked to select a new option April 2016 October 14, 2016 New SEC MMMF reforms effective date New website disclosures December 2015 Fidelity completes MMMF mergers, name changes and conversions March 2016 A small number of Plan Sponsors with special situations (see Q&A) need to select a new option for all balances in the account April June 2016 Period during which all remaining institutional accounts with retail Fidelity MMMFs need to be redeemed For any additional questions regarding the implementation of MMMF changes, please consult with your Managing Director or other Fidelity representative. 6

7 Your Specific Questions Answered by Our Investment Professionals Q As a plan sponsor, I d like to avoid the possibility of any fees and gates that could affect the timely and proper execution of plan transactions. Is the use of a government/treasury MMMF the best approach to maximize the likelihood that my participants will have uninterrupted access to their funds after the SEC changes? A Yes, the plan s fiduciaries are responsible for the selection of the plan s investment options including whether to offer a MMMF and if so, which type. As government funds are the only MMMFs that will be exempt from potential redemption restrictions (fees and gates) after October 2016, these MMMFs offer the greatest possibility of seamless transaction processing. As the result of a number of fund changes made to accommodate the SEC s reforms, Fidelity Money Market Trust Retirement Government Money Market II Portfolio (FRTXX) has become the leading Fidelity government MMMF for DC plan sponsors seeking an administrative offset. Q I have a non-fidelity MMMF in my retirement plan lineup. What kind of assistance will I receive from Fidelity regarding potential redemption restrictions for this MMMF? A Fidelity will have the functionality to apply the necessary fees and gates to retail and institutional non-fidelity MMMFs, and will continue to work with outside MMMF companies to assure that the necessary processes are in place to ensure compliance with the new rules in October. There may be instances, however, in which the functionality used by Fidelity does not mirror that of other MMMF investment managers and recordkeepers. Q What happens if I retain a prime MMMF in my plan after the compliance date of October 2016? A You may retain the type of prime MMMF for which the account is qualified after October However, to mitigate the impact to the processing of certain participant trans actions, you should designate a contingency fund that will be used should a gate become necessary. This direction must be received by Fidelity prior to October Q If a redemption gate were imposed on a prime fund in my plan, would purchases also be restricted? A Possibly. If the board of trustees of a prime MMMF were to impose a redemption gate, a fund may or may not also restrict purchases into the gated fund at that time. Q I currently utilize a prime MMMF as the default fund for the self-directed brokerage ( SDB ) offering in my retirement plan. If I choose to maintain this after October 2016, are there issues I should consider? A As plan sponsor, you should understand that the potential application of a gate to a prime MMMF could delay the processing of asset transfers from the SDB account to the plan. The selection of a government MMMF (exempt from fees and gates) in this instance could mitigate any interruption of service to your participants. Q Assets in my retirement plan s forfeiture account are invested in a prime MMMF. Can this continue after the compliance date? A Yes, but as plan sponsor, you should understand the potential application of a prime fund gate on a forfeiture account. The selection of a government MMMF (exempt from fees and gates) in this instance could mitigate any interruption of service to your participants. 7

8 Q My plan has a prime MMMF that holds revenue credits that are used to pay plan expenses and/or are allocated to participant accounts. Does this need to change under the new SEC rules? A No. However, given that prime MMMFs are subject to potential fees and gates, the use of a government MMMF (exempt from fees and gates) in Revenue Credit Accounts could mitigate any interruption of service to your participants. Q My retirement plan investment menu includes an FMTC-administered unitized stock fund that uses a retail prime MMMF for liquidity purposes. Can this continue after October 14, 2016? A No, unitized stock funds are considered institutional accounts and may not use retail prime MMMFs. Since a prime MMMF used for liquidity purposes is subject to potential fees and gates, it should no longer be used for liquidity after the implementation of the new rules. You must provide direction to replace the fund with a non-prime government or Treasury MMMF by March 2016 to avoid any interruption in service to your participants. Q Will the reforms affect MMMFs held in Rabbi trusts supporting non-qualified plans? A After a review of SEC guidance, Fidelity believes that this type of trust established for non-qualified plans is not eligible to invest in retail MMMFs. Other MMMF providers may have a different view. Thus, the Fidelity retail funds offered in a non-qualified Rabbi trust will close to new purchases effective April 1, 2016, and balances must be redeemed. Plan sponsors will need to provide direction as to where the proceeds should be reallocated. Q I currently utilize a Fidelity Freedom fund in my plan. Do the new rules have an impact on my use of the Freedom funds, and can a Freedom fund continue to be used as the default fund in my 401(k)? A Shareholders of Fidelity Freedom funds are not directly impacted by the new SEC rules for MMMFs. Freedom funds are not MMMFs. They can continue to be used as 401(k) default funds. Q I utilize a stable value or annuity product in my plan. Do the new rules have an impact on those products? A Stable value and annuity products are not MMMFs, and are not subject to the new rules. However, managers of such products who maintain a small percentage of assets in MMMFs for liquidity purposes may prefer to utilize a fund not subject to potential fees and gates. 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 Department of Labor ( DOL ) regulators, there has been no official DOL pronouncement regarding certain questions that have arisen under ERISA as a result of the new SEC MMMF reforms. For example, many plan sponsors use a MMMF to meet ERISA Section 404(c) requirements in exchange for fiduciary protection against participant losses. Fidelity is working with a number of trade groups to gain clarity on this question as well as a number of other technical questions. If you want additional information, please visit: 8

9 Money Market Glossary Floating NAV money market mutual fund: A prime (or municipal) institutional money market mutual fund pricing and trans acting its shares out to four digits (e.g., $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 one 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 normally invests at least 99.5% of its total assets in cash, government securities, and/or repurchase agreements that are fully collateralized with 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 potential liquidity fees and redemption gates. A U.S. Treasury and U.S. Treasury Only money market mutual fund will fall under this definition. Institutional non-government money market mutual fund: An institutional money market mutual fund is a prime or municipal fund that does not qualify as a retail fund. Investors who are not natural persons, such as small business, large corporations and pension plans, are able to purchase institutional funds. Natural persons will also be able to purchase institutional funds. In addition to the potential for liquidity fees and redemption gates, institutional funds will transact at a floating NAV. 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 money market mutual fund does not fall under the government fund definition. Prime money market mutual fund: 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 may also be known as a general purpose money market mutual fund. Retail non-government money market mutual fund: A retail money market mutual fund is a prime or municipal fund that limits all beneficial owners to natural persons or individual investors. This definition includes individuals investing through individual accounts, retirement accounts, college savings plans, health savings plans, and ordinary trusts. Retail funds are not required to have a floating NAV. Retail prime and municipal funds are subject to the potential for liquidity fees and redemption gates. 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 potential liquidity fees and redemption gates. U.S. Treasury Only money market mutual fund: A money market mutual fund that invests 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 potential liquidity fees and redemption gates. Weekly liquidity: Weekly liquidity is a measure of MMMF s ability to meet redemptions, and consists of fund holdings that can be readily converted to cash within five (5) business days. Examples of liquidity holdings include cash, direct obligations of the U.S. government, government agency discount notes with remaining maturities of sixty (60) days or less, securities that will mature or are subject to a demand feature that is exercisable and payable within five (5) business days, and receivables scheduled to be paid within five (5) business days. 9

10 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. 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