The Investment Company Institute released a report on defined contribution plans, "The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2014," which shows that money market mutual funds represent just 3% of the $2.9 trillion in 401(k) plan mutual fund assets, or roughly $87 billion. We also report on a story published by Plan Sponsor magazine entitled "Clearing Up Money Market Fund Reform Misunderstanding" which looks at the need to educate 401(k) plan sponsors and participants on the SEC money market reforms. Finally, we examine trends in US Dollar, Euro, and Sterling money markets from Moody's "Prime Money Market Funds 2Q Review."
The 32-page ICI 401k report is mostly focused on equities, and to a lesser extent bond funds, but there was some information related to money funds. Mutual funds make up 63% of the $4.6 trillion in 401(k) plans, and money funds represent just 3% ($87 billion) of this $2.9 trillion. It explains, "Only 3 percent of 401(k) mutual fund assets were invested in money market funds at year-end 2014. 401(k) participants holding money market funds had an asset-weighted average expense ratio of 0.16 percent in 2014, down from 0.19 percent in 2013. (In 2012 it was 0.21%). The decline in money market fund fees over the past few years has been largely because of investment advisers waiving advisory fees in the current low interest rate environment."
The Plan Sponsor article says, "Some qualified retirement plan sponsors and service providers are misinterpreting the likely impact of the Securities and Exchange Commission's (SEC) money market fund reforms, opining the rulemaking will necessarily drive defined contribution (DC) plans away from retail money market funds. The SEC is focusing on educating the retirement planning industry about the likely impacts of money market fund reforms adopted in 2014."
It continues, "The passage contains helpful discussion of what it takes to qualify as a retail money market fund, and how floating NAVs will be calculated and applied, along with guidance about the fees and redemption gates that have caused some Employee Retirement Income Security Act (ERISA) fiduciaries to doubt whether they’ll still be able to offer retail money market funds. This is a common misconception -- that retirement plan fiduciaries will be flat out required to start using government-sponsored money market funds, which will not gain the use of liquidity fees and/or redemption gates. In fact this is not the case, and the rules provide important exceptions for investing in retail money market funds that could ease plan sponsors' fiduciary concerns."
The Plan Sponsor piece goes on, "Critical for plan sponsors to understand is the fact that there is an exception for the floating NAV requirement for any money market fund that is a retail fund -- and retail funds are defined under the new rulemaking as funds in which only natural persons can invest. The money market fund rulemaking generally understands DC retirement plans as collections of natural persons, rather than as a distinct class of institutional investors. This, in turn, means most DC plans will be able to continue to invest in retail money market funds."
On fees and gates, it adds, "A big question for plan sponsors will be whether they feel comfortable, considering their fiduciary duty, with the prospect of plan participants potentially facing liquidity fees and gates within retail money market funds.... It could be distressing for a plan participant to face a liquidity fee or redemption gate, but plan sponsors can protect themselves from liability by educating participants about this possibility, and coaching them to stick with their long-term investing goals even during short-term periods of market stress.... Something else to consider is that it will be harder, if not impossible, for defined benefit (DB) plans to qualify as natural person investors. Therefore DB plans are probably likelier to have to switch to government money market funds, or another similar asset class."
Moody’s 2Q review of the US money fund market finds maturities tightening, liquidity increasing, and credit quality improving. On the latter point, it says, "Changes in rating reference points for certain bank obligations leads to improvements in funds' credit quality.... This change resulted in a sizeable quarter-over-quarter jump in exposure to securities rated Aa2 or better. `For US prime funds, the percentage of assets invested in Aa2 or better securities rose to 50% from 41%, while the percentage in European and offshore prime funds increased to 46% from 35%."
It also comments on liquidity and maturities, "The percentage of overnight maturities to total assets reached its highest point in a year in Q2, with 34% of assets invested in overnight securities, on average, up from an already elevated 32% in Q1. Although new US MMF reforms, which introduce floating net asset values (NAVs) and liquidity fees and redemption gates, do not go into effect until Q4 2016, prime fund managers have begun to increase immediate liquidity in portfolios in preparation for potentially large asset flows out of prime funds."
Also, Moody's says, "Prime fund managers continued to shorten portfolio WAMs in anticipation of a possible September Fed rate hike. Average WAMs for both US and European and offshore prime funds reached a low for the last twelve months of 31 days and 37 days, respectively. Moody's expects managers to maintain shorter portfolio WAMs to prepare for a period of potentially rising short-term rates."
Furthermore, they comment, "Assets under management in Moody's-rated US prime funds fell 5% to $623 billion in the quarter, a low point for the year. AUM in Moody's-rated US prime funds were down 8% through the first six months of the year. These funds have experienced 1H net outflows in each of the last four years, though this has typically been followed by net inflows in the second half of the year. This trend is already repeating in Q3, with funds reporting net inflows in July."
Regarding Euro Prime Money Funds in 2Q, it says, "Assets under management fell to their lowest level in 12 months, falling 21% in Q2 to EUR54 billion. The advent of net negative yields in the middle of 2Q affected all euro prime funds, as it prompted investors to limit their cash balances denominated in euros and/or to invest directly in higher yielding instruments (short-dated bond funds, segregated mandates, commercial paper, etc)."
Finally, Moody's review of Sterling MMFs <b:>`_ says, “Exposure to European financial institutions remains historically low. Aggregate exposure to European financial institutions dropped 1 percentage point to 32% of total investments (or L31.4 billion) at quarter-end, the second lowest level in twelve months. This drop was mainly driven by the reduction (-L3.1 billion) in holdings of UK bank paper. AUM fell to the lowest level since the beginning of the year. Prime fund balances are back below the L100 billion mark following a 6.4% quarterly drop." (Note: Crane Data will be hosting its 3rd annual European Money Fund Symposium next month in Dublin, Sept. 17-18. Visit www.euromfs.com for more details or to register.)
