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NOW: The new U.S. Securities and Exchange Commission (SEC) rules took effect in October, and Jacobson says they have led many sponsors to make a change. “Most plans, at least the larger ones, were using institutional money market funds. Those funds are now subject to a floating NAV [net asset value]” so now get priced based on market value and, theoretically, face future volatility.
 
“Institutional funds are also now subject to ‘gates’ and ‘fees,’” she says. “This means that if there is a run on money market funds, the funds can impose gates—rules that say investors may not sell their shares in the fund for a period of time—or fees, meaning that the fund can say that when you sell your shares, you’ll get a haircut off the balance of your account.”
 
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She says many sponsors evaluating a change this year considered moving to a retail money market fund—doing so eliminates the floating NAV issue but can impose those redemption gates and fees. Another option has been to switch to a government money market fund; those have a stable NAV, and Jacobson knows of none that implement gates and fees.
 
FUTURE:
In the current interest rate environment, with rates inevitably rising at some undetermined future time, many sponsors do not want participants to, potentially, have trouble getting out of a money market fund, Jacobson says. “Most sponsors moved to a government fund because of the perceived risk of gates and fees,” she says.
 
Droblyen also has seen plans switch from a money market fund to a stable value fund, for the higher returns. “Although there is not much difference in the yield right now, that could change as interest rates rise,” he says.