Understanding the Adjustments in the Money Market Reform Act: What You Should Be Aware Of
The Impact of Money Market Reform Act: What Investors Need to Know
The implementation of the money market regulations in October 2016 brought significant changes for investors. Although these reforms originated from rules set by the Securities and Exchange Commission (SEC) in 2014, the new money market regulations transformed a longstanding investment option. Here’s a breakdown of the implications of the Money Market Reform Act since its introduction.
Explaining the Changes
The SEC designed the new regulations to address investor run risks in money market funds while maintaining their benefits. These rules established three categories of funds: retail, governmental, and institutional. Institutional funds, commonly found in retirement plans like 401(k)s, underwent significant changes due to the regulations.
Floating Net Asset Value
Institutional money market funds were required to transition from a fixed $1 price to a fluctuating net asset value (NAV) as part of the Reform Act. This new rule means share prices will vary with market conditions. However, government and retail funds can still maintain a stable NAV of $1 per share.
Fees and Gates
The regulations allow money market fund boards to impose fees or temporarily halt redemptions during financial stress. A fee or gate can be triggered when liquid assets fall below 30% of total assets. The board may impose a redemption fee of up to 2% or suspend redemptions for up to 10 business days within a 90-day period.
If liquid assets drop below 10% of total assets, a redemption fee of up to 1% can be imposed, with the board having discretion to set it higher or lower for the fund’s best interest. Government funds may also impose fees or gates but are not mandated to do so.
Portfolio Diversification, Disclosure, and Stress Testing
The regulations also encompass enhanced diversification, disclosure, and stress-testing requirements for money market funds. While vital, these amendments have a less direct impact on individual investors compared to other aspects of the Act.
Questions Asked
Following the market changes, investors had to reassess their options, particularly within their employer-sponsored 401(k) plans. Employers had to decide whether to switch to alternative funds like government money market or stable value funds. When considering a new fund, it’s important to ask questions about interest rates, fees, and the fund’s performance history.
Stable Value Fund
Stable value funds, a combination of insurance and bonds, offer a minimum guaranteed interest rate from an insurance company. These funds provide a higher median interest rate compared to money market funds but carry risks related to bond quality and insurance company stability.
Investors should consider the stability and credit quality of underlying assets in stable value funds, as failure in either area can lead to losses. Comparing these risks with potential lower yields in government money market funds is crucial for making informed investment decisions.
The Bottom Line
In light of these changes, investors should be aware of their redemption options and associated risks. It’s essential to evaluate alternatives like stable value funds and government money market funds carefully to make informed decisions about where to allocate investment funds.
