Capitol News

Art by Raymond BiesengerExplaining Money Market Fund Reforms
The Securities and Exchange Commission (SEC) is focusing on educating the retirement planning industry about the likely impact of money market fund reforms adopted in 2014. In short, the rule amendments require providers to establish a floating net asset value (NAV) for institutional prime money market funds, which will allow the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets. The rule updates also provide nongovernment retail money market funds with new tools, known as liquidity fees and redemption gates, to address potential runs on fund assets.

There is a common misconception that retirement plan fiduciaries will be required to start using government-sponsored money market funds, which will not gain the use of liquidity fees and/or redemption gates. This is not the case; the rules provide important exceptions for investing in retail money market funds—exceptions that could ease plan sponsors’ fiduciary concerns.

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; retail funds are defined under the new rulemaking as funds in which only natural persons can invest.

The money market fund rulemaking generally understands defined contribution (DC) retirement plans as collections of natural persons rather than as a distinct class of institutional investors. This, in turn, means most defined contribution plans will be able to continue to invest in retail money market funds.

During the Washington, D.C., fiduciary rule hearings in early August, Department of Labor (DOL) officials heard plenty of reasons why the rulemaking effort is flawed in the eyes of the service providers it is meant to regulate. However, that does not mean the DOL intends to capitulate on its long-running plan to strengthen the fiduciary standard.

Despite a torrent of negative comments about the proposed rule changes aired at the hearings, in a letter that surfaced online, Labor Secretary Thomas Perez seemed to double down on the rulemaking effort. The letter appears to reject outright an earlier call from a bipartisan group of U.S. lawmakers to halt or slow the new fiduciary rule’s adoption, with Perez writing that the DOL remains fully committed to an updated fiduciary standard.

Lawmakers had asked Perez to put the brakes on the rulemaking process, and many shared the same concerns providers gave when addressing the department in person at the comment hearings. Those fears include the worry that a stricter advice standard will push providers away from lower-balance savers and cut off the sources of advice that people rely on when making individual retirement account (IRA) rollover decisions and other challenging plan-related choices. For their part, DOL officials fielding comments from providers repeatedly highlighted the flexibility they believe has been programmed into the fiduciary rule proposal.

Implementing the proposed fiduciary rule will cost independent financial services firms $3.9 billion in startup costs, according to a study by the Financial Services Institute (FSI) and Oxford Economics. This is nearly 20 times the estimate that the Department of Labor (DOL) gave and does not take into account the ongoing costs of maintaining compliance with the rule.

Further, the report, titled “Economic Consequences of the U.S. Department of Labor’s Proposed New Fiduciary Standard,” states the rule will limit advice to high-net-worth individuals alone, as they will be the only people able to afford it.

Startup costs will range from $930,000 to $28 million per firm, depending on size, the study finds. Broker/dealers (B/Ds) would have to substantially change their business models from commissions to fees, to be in compliance with the “best interest contract,” or BIC, exemption. As a result, smaller B/Ds might go out of business, FSI says, and investors may not see the returns they are now getting as they will be pushed into low-cost assets. Furthermore, the BIC exemption would open the door to unforeseeable litigation costs, the firm contends.

FSI estimated the average expenses for several services: Recordkeeping will cost firms an average of $200,000; implementing BIC exemption contracts, an average of $4.5 million; training, an average $800,000; compliance and legal oversight, $210,000; disclosure, $870,000; and setting up new system interfaces, an average $570,000. Litigation costs will also be substantial, FSI says.