Submitted by: Derek Fiorenza CPFA, C(k)P®, AIF®, PPC™, MSBA, COO/CCO, Summit Group Retirement Planners, Inc.

What are Money Market Options in Defined Contribution Plans?

According to Investopedia, the money market is a subsection of the fixed income market specializing in very short-term debt securities (typically maturities of less than 1 year).  They are issued by the government, financial institutions, and large corporations.  They are extremely liquid, but tend to offer very low returns.

Money Market Statistics

As of June 23, 2016 the total assets invested in money markets represents $2.70 trillion (Investment Company Institute).  This is broken up into retail and institutional assets.  Retail refers to individuals, and institutional is associated with retirement plans.  Out of the $2.70 trillion invested in money market assets, the retail portion is $957.86 billion and the institutional portion is $1.75 trillion.

Another fixed income option that we will discuss is the stable value fund.  A stable value fund is an investment vehicle commonly found in corporate retirement plans.  They are collective investment trusts mainly comprised of short term debt, but typically they have longer maturities thus contributing to the potential for a higher yield.  Lastly, they are insured or wrapped with insurance contracts to guarantee a stated minimum return.

Money Market Reform

In 2014, new rules under the Investment Company Act of 1940 that amended the operation of money market mutual funds were approved by the SEC.  One of the requirements of the SEC were for non-governmental money market funds to sell and redeem shares based on the current market-based valuation of the portfolio (rounded to the fourth decimal place).

Several other results of this legislation will enable fund boards new flexibility to control heavy redemption demands during periods of stress.  Additionally, effective on or before October 14, 2016, every money market fund will be required to classify itself as one of three options: government, retail, or institutional (classification reflects underlying portfolio).  The regulations are designed to preserve the benefits of money markets and to help ensure the valuation of each fund is transparent for investors. 

Application for your retirement plan

Review the investment option classification of money market that your plan offers (government, retail, or institutional).  As a fiduciary of a retirement plan it is your responsibility to have a process in place to review and monitor why you have selected a specific strategy.

Further Reading

For further reading about the Money Market Reform, please refer to the References below or contact Summit Group Retirement Planners, Inc. Representative: 267-433-1050 or  Summit Group Retirement Planners, Inc. specializes on collaborating with employers on the design, installation, and ongoing servicing needs of their retirement programs.