chalk talk | PLANADVISER August/September 2012

Enduring Investments

The money market instrument as we know it

By Steff C. Chalk | August/September 2012
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If you were asked to describe the retirement plan industry landscape of 2018, what might it look like? One’s crystal ball is sure to include investments that we have not yet seen, designed or even conceived of but most likely packaged in structures that have been around for ages, like the mutual fund and the separate account. Maybe by then the exchange-traded fund (ETF) landscape will be even larger or, possibly, extinct. Making five-year projections in an industry that changes as rapidly as this one is a recipe for being incorrect. It is risky business. 

At the onset of 2012, would many among us have envisioned the need for a wholesale rework, restructure and replacement of the time-tested traditional $2.5 trillion money market fund industry?

Preventing a Run 

Regulators and legislators have decided that something must be done to shore up the industry. The Financial Stability Oversight Council, a body created as a result of the Dodd-Frank Act, has been a proponent of capital-buffers and withdrawal limits.

It is easy to cite the safeguards and enhancements that could make the money market investments more appealing and more efficient than they are today. In the eyes of the retirement plan adviser, money market funds are a hybrid between an asset class and a safe-haven holding structure.  

Could they more favorably compensate the investor? Sure. Could money markets yield more? In an efficient market scenario, where a large number of managers are chasing yield among a finite number of securities, all within the confines of maturity and liquidity restrictions—probably not. When all managers are looking for the same thing, that being higher yield and safer investments, the market itself winds up dictating the yield. In fact, one can view yields on regular intervals and recognize that these funds operate and perform within a narrow band of returns.