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.