Still No Case for Money Markets in Defined Contribution Plans
DC Fiduciary Breach Drumroll Continues
In the first two weeks of November 2015, there were two significant settlements of class action suits
alleging sponsor breach of fiduciary duty. Boeing settled a suit alleging excessive fees and failure to
put plan services out to bid for $57 million. Novant Health settled a suit for $32 million and agreed to
sweeping changes in plan administration, including hiring an investment advisor to review plan
options, the review of all plan options, and the requirement of RFPs for plan services including
recordkeeping, investment consulting and participant education.
These two cases follow earlier victories in Abbott v. Lockheed Martin, Ameriprise and above all in
Tibble v. Edison. The elements of the Novant settlement may well indicate the direction the lower
courts will take when they put meet on the bones of the Supreme Court’s decision in Tibble. Plan
sponsors who continue to use money market when the case for stable value is so overwhelming may
be exposing their firms to significant damage awards for breach of their fiduciary duty.
Stable Value options have continued to outperform Money Market Funds in the third quarter of
2015. The chart below compares the growth of $100 invested in stable value and money market for
the ten year period ending 9/30/2015 in constant dollars. In nominal terms, $100 invested in stable
value would have grown to $139.44, but in money market only to $113.70.(1) Money market did not
outperform stable value for a single quarter during this period, and the stable value earnings were
almost triple money market earnings.
Accumulated Value in Constant Dollars
$120.00
$110.00
$100.00
$90.00
$80.00
Stable Value
Money Market
The Federal Funds Rate continues to hover around all-time lows, with financial experts and
economists predicting a rate hike before the end of the year. A recent interview in the WSJ with a
Fed official suggested that although a rate hike may occur in September, the Fed intends to move
gradually once it starts.(2) In this continuing low interest rate environment, Stable Value Funds should
continue to produce higher returns than Money Market Funds. The chart below summarizes how
Stable Value has outperformed Money Market in recent periods.(1)
Nominal Return
3 Month (Actual)
1 Year (Annualized)
3 Year (Annualized)
5 Year (Annualized)
10 Year (Annualized)
Stable Value
0.4873%
1.9167%
1.8577%
2.3408%
3.3158%
1
1
iMoney
0.0050%
0.0165%
0.0146%
0.0187%
1.2211%
7
CPI
-0.2904%
-0.0361%
0.9330%
1.7254%
1.8137%
Real Return8
Stable Value
0.7800%
1.9536%
0.9161%
0.6050%
1.4754%
iMoney
0.2962%
0.0527%
-0.9099%
-1.6778%
-0.5820%
An additional point to consider is the fee waivers that have been granted by most Money Market
Funds. According to the Money Fund Expense Report, 98.6% of Money Market Funds gave fee
waivers and $23.9 billion in fees have been waived since 2009.(3)(4). A study by Moody’s Investors
Service finds money market portfolio returns bottomed out in January of 2015. Since then,
annualized portfolio returns have increased 1.8 bps, while expense ratios have increased 1.5 bps.
This shows that over 80% of the increase in performance for money market funds since January has
been kept by the fund advisors! Moody’s study further suggests that fund yields have to further
increase 40-50 bps before these incremental fee waivers go away and expense ratios return to pre2008 levels.(5) Some funds even have additional “clawback” clauses that may allow them to recoup
previously waived fees.(6) There have been no such waivers or “clawback” clauses for stable value
funds.
A final potential drag on Money Market returns is the impact of new regulations that are set to take
effect in October of 2016. These regulations create the potential for exit fees or gates in the event
that money market funds suffer a liquidity crunch. The possibility of these exit fees or gates may
cause money market funds to be either managed more conservatively or substituted with lower
yielding government funds. This may further drive down yields as the demand for government funds
increases.
There has never been a rational investment argument to choose money market over stable value.
However, now more than ever plan sponsors who stick with money market are needlessly impairing
the retirement income security of participants who value safety of principal.
1
Stable Value numbers represent stable value returns actually credited to participants for MetLife clients who
allowed us to use their data. This data may not be representative of returns for the asset class as a whole.
Money Market numbers obtained from Imoney.net
2
http://www.wsj.com/articles/atlanta-feds-lockhart-fed-is-close-to-being-ready-to-raise-short-term-rates1438709252
3
http://www.imoneynet.com/news/543.aspx
4
http://cranedata.com/archives/all-articles/5232/
5
Epstein; Callagy; Sri-Saravanapavaan; Pinto. “Global Managed Investment: Rising Rates to Unleash $5 billion
for US Money Fund Sponsors.” Moody’s Investors Service
6
http://www.wsj.com/articles/SB10001424052702304014504579248542262335648
7
CPI Index used is the US CPI Urban Consumers Index from Bloomberg
8
Real return calculated by (1 + Nominal Return)/(1 + CPI) – 1
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