We learned from two niche financial information websites about two separate lawsuits involving brokerage sweeps and money funds, and money funds and stable value funds, respectively. In the first, publication AdvisorHub quotes us in its article, "Merrill Sued for 'Paltry' Sweep-account Interest Rates." They write, "A woman who last year had more than $1 million of cash in three Merrill Edge accounts earning 0.14% and a Bank of America checking account paying 0.06% has filed a class-action lawsuit alleging unjust enrichment and deceptive trade practices over Merrill Lynch's cash sweep programs." In the second, publication PlanSponsor discusses, "Choosing Between a Stable Value or Money Market Fund." This article says, "There have been lawsuits filed against retirement plan sponsors for offering stable value funds as opposed to money market funds, and vice versa."
The first (AdvisorHub) piece explains, "'Merrill's ... sweep accounts pay investors a paltry 0.05% to 0.14% annual percentage yield,' Sarah Valelly charged in the complaint filed on Tuesday in federal court in New York's southern district. The lawsuit accuses Merrill Lynch, Pierce, Fenner & Smith, the broker-dealer for Merrill Wealth and Merrill Edge customers, of hiding disclosure about sweep options in difficult-to-read account opening documents and of shifting cash from brokerage accounts without the 'prior written affirmative consent' required by Securities and Exchange Commission, Financial Industry Regulatory Authority and New York Stock Exchange rules and regulations."
It quotes "The plaintiffs have an uphill battle, said Peter Crane, president of Crane Data, which publishes a newsletter on money-market fund returns. 'The ultimate defense is that brokerages can say they are not holding their customers hostage,' he said, noting that he knows of no similar lawsuits. 'They send you a checkbook for these accounts, for G-d's sake, [so] you can move your money. Brokerage sweep and bank checking accounts are normally set up for convenience, not yield.'"
The article adds, "Merrill last year ended its policy of sweeping cash from brokerage accounts into higher-paying money-market funds, directing it instead to BofA accounts. Brokers who want to assuage rate-sensitive customers now have to manually direct cash into money-market funds."
The PlanSponsor piece tells us, "Lawsuits have led to confusion about which direction retirement plan sponsors should go when choosing a capital preservation fund for their plan lineup.... It is important for defined contribution (DC) retirement plan sponsors to know what to weigh about each type of capital preservation fund when deciding what to include in their plan lineups."
John Faustino, chief product and strategy officer at Fi360 explains, "Stable value funds ... invest in both short- and intermediate-term securities and follow the traditional concept of investing where the value of money over time generates a higher yield.... They tend to hold investments that are slightly less liquid and, as a result, have a higher yield. Plus, they have an insurance wrapper that protects the value of the assets should there be a fluctuation or a decrease in the assets' value."
It continues, "For this reason, Antonis Mistras, managing director, alternative investments at DuPont Capital in Wilmington, Delaware, believes that stable value funds are preferable choice to money market funds: 'Their yields are not based on overnight rates but further out on the spectrum,' he says. 'They aim to capture the premium two-and-a-half years to three-and-a-half years, which, would normally capture about two percentage points above money market funds. However, in today's yield curve, that is not there. History has shown, though, that stable value funds have outperformed money market funds anywhere from one percent to three percent.'"
The update adds, "But there are considerations that sponsors should keep in mind when assessing whether to offer a stable value or money market fund, the experts say. 'Mutual funds' biggest benefit is they offer the most flexibility in terms of transparency,’ says Matt Patrick, team leader, investment solutions at CAPTRUST in Raleigh, North Carolina. 'They are also easily portable, so if the plan sponsor wants to move to another recordkeeper, they can take their money market fund with them. Plus, for participants, they can easily move their money in and out of a money market fund.' Stable value funds typically set time limits up to a year before an investor can withdraw their money, Faustino says."
It continues, "The most important thing to consider when evaluating a stable value fund, Faustino says, is the ability of the multiple wrap providers to pay. 'Lawsuits brought against sponsors for stable value funds are often premised on the fact that the proper due diligence wasn't done on the front end,' he says. 'It is also important to look at the relative yields of those investments compared to alternatives. That it critical with the capital preservation choices.’ Also, because there isn't as much data on returns -- changes in the crediting rate associated with the insurance wrappers for stable value funds, compared to the information available on money market funds -- it is important for sponsors to work with advisers.'"
Finally, PlanSponsor quotes Timothy Grove, a VP in Prudential Retirement's stable value business, "The litigation against stable value funds has primarily focused on the exit provisions, the lack of transparency and the fees, whereas the suits against money market funds have focused on the low returns over the past decade."
For more on stable value funds, see these Crane Data News articles: Asset TV Hosts Apostol, Howe on Stable Value; ICD Portal Shows Growth (4/3), SF Fed on Repo Facility; Heitman Hits Stable Value; Brokered Deposits (3/13) and Bond Fund Symposium Gears Up for Philly; Stable Value Data Acquisition (2/27).
