Morgan Stanley is changing the terms of its brokerage "sweep" options to direct more parked cash into its bank deposits programs and away from its money market mutual funds. In a letter to investors and on its website, the company explains, "Deposit balances above $2 million in an account are swept, without limit, to MGPXX [the $15.0 billion Morgan Stanley Inst Liq Govt Sec Part]. Beginning June 6, 2018, deposit balances above $20 million in an account will be swept, without limit, to MGPXX." Going forward, balances from $2 million to $20 million will now be swept into banks instead of the higher-yielding money market fund -- currently, MGPXX is yielding 1.23% vs. rates of 0.10% to 0.70% for the bank deposit options. (See also our May 29 News, "Schwab Money Market Fund Liquidates, Shift to Bank Deposits Continues.")
Morgan Stanley's "Bank Deposit Program Disclosure Statement" explains, "Under the Bank Deposit Program, free credit balances in your Active Assets Account [and a number of other accounts] ... will be automatically deposited into deposit accounts established for you by and in the name of Morgan Stanley Smith Barney LLC at Morgan Stanley Bank, N.A., and Morgan Stanley Private Bank, National Association, ... and for free credit balances above $2,000,000, Morgan Stanley will sweep such balances into a sweep fund.... Your monthly Account statement will reflect your balances in each Sweep Bank and, if applicable, the Sweep Fund. Beginning June 6, 2018, Morgan Stanley will be raising the 'Deposit Maximum' from $2,000,000 to $20,000,000 so that, as described under 'Deposit Procedures,' any free credit balance above $20,000,000 will be swept into a Sweep Fund."
It continues, "Currently, the Deposit Maximum is a total deposit amount of $2,000,000. As a reminder, beginning June 6, 2018, funds will be deposited into the Deposit Accounts up to the new Deposit Maximum amount of $20,000,000 across both Sweep Banks.... Once your deposits reach the Deposit Limit at both the Primary and Secondary Sweep Banks, available cash will be deposited into your Deposit Accounts at the Primary Sweep Bank, up to the Deposit Maximum, even if the amounts in the Deposit Accounts at the Primary Sweep Bank exceed the Maximum Applicable Insurance Limit."
The disclosure adds, "If your Account is eligible, the Sweep Fund available for your Account is the Morgan Stanley Institutional Liquidity Funds Government Securities Portfolio (symbol MGPXX). The Deposit Maximum and the Sweep Fund are subject to change with prior notice to you from Morgan Stanley.... As a reminder, beginning June 6, 2018, funds will be deposited into your Deposit Accounts at the Sweep Banks up to the new Deposit Maximum of $20,000,000."
A letter to shareholders explains, "Clients with balances between $2 million and $20 million in MGPXX as of June 6, 2018 will have those balanced placed by Morgan Stanley with the Sweep Banks (one or more depository institutions affiliate with Morgan Stanley) with a preferred interest rate (the 'Preferred Deposit' that will track the MGPXX yield for an interim period no less than six months. After the interim period, the rates will be set consistent with prevailing market conditions."
It adds, "As a result of this change, clients with balances in excess of $2 million as of June 6, 2018 will have available free credit balances swept for to Morgan Stanley Private Bank, National Associate up to the deposit limit, then to Morgan Stanley Bank, N.A. up to the revised $20 million deposit maximum."
In other news, this week's Pensions & Investments published an article entitled, "Retirement plan sponsors tread lightly with capital preservation." Subtitled, "No matter which option they choose, they risk getting hit with lawsuits," the piece says, "In providing capital preservation options for investment menus, some defined contribution plan executives have wound up in the crosshairs of participants' lawsuits alleging fiduciary breaches of the Employee Retirement Income Security Act."
It explains, "Some sponsors have been sued because they offered a money market fund instead of a higher-return stable value fund. Sponsors and providers have been sued for offering a stable value fund whose fees were too high. Or because the funds were too conservative. Or because the funds were too aggressive."
The P&I report continues, "Despite some settlements -- such as the preliminary agreement this month by Philips North America to pay $17 million -- many defendants have prevailed as federal district court judges and appeals court judges have rejected plaintiffs' arguments. For example, judges have rebuffed complaints that the CVS Health Corp. stable value fund was too conservative and that Chevron Corp. should have offered a stable value fund instead of a money market fund."
It tells us, "ERISA lawsuits attacking the offering of money market funds instead of stable value funds allege the latter produce higher returns than the former, especially in recent years of low interest rates. However, DC consultants said stable value might not be appropriate or desirable for some plans."
The article comments, "Stable value is harder to explain to participants, more difficult to administer than money market funds and might have multiple restrictions imposed by the provider and, especially, the wrap provider, which offers insurance to maintain book value for investors in the underlying bonds."
Finally, it adds, "Wrap contracts can restrict a plan's offering so-called competing investments such as money market funds and short-term bond funds. Wrap providers can impose penalties and restrictions based on employer-generated events, which can be a merger, a spinoff, bankruptcy, a re-enrollment or the adding of a self-directed brokerage account depending on the contract."
