Does Anyone Really Know?
Everyone takes money market funds for granted. Don’t know where to invest idle cash? Stick it in a money market fund, right? Our entire financial system treats money market funds as safe and secure investments.
And, they are safe. Until they are not.
Today’s NYT, Hopeful, but Wary at Money Markets, prudently identifies the fault lines and risks associated with money market funds. Fortunately, Edward Wyatt’s reporting is not a Chicken Little, the-sky-is falling rendition of risks inherent in the financial markets. [The press and blogosphere are filled with too many of these.] Instead, Wyatt effectively outlines and explains the risks inherent in money market funds in the context of extreme volatility in treasury securities.
Money market funds exist solely by virtue of a vastly complicated regulatory structure. Anyone interested in the risks associated with money market funds must be familiar both with the regulations as well as with the investment securities. One without the other is simply half-the-story.
And, as the Wyatt’s article points out, money market funds are not free from risk. During the financial crisis of ’08-’09 one of the largest money-market funds, Reserve Primary Money Market Fund, “broke the buck”. That is, investors lost money.
Plan Sponsors often are not familiar with all of the intricacies surrounding money market funds. As fiduciaries, however, they should understand the general parameters of the risks. And, more importantly they should make sure that the experts they have hired are in fact experts on every intricacy and beyond. The hired experts, however, do not take the plan fiduciaries off the hook. Everyone needs to be doing their job.
Wyatt, quoting an executive from Fidelity Investments, reports that Fidelity, which manages $440 billion in money market assets, has had “a contingency team focused on this since the end of May.” Fidelity recognizes that “we have to be prepared to respond to the unthinkable”.
In light of the Reserve Primary Fund’s experiences just a few short years ago, the previously unthinkable is not so unthinkable.
If Fidelity is engaged in contingency planning, prudent dictates that all plan fiduciaries should be engaged in similar contingency planning. In the financial world, the unthinkable can happen. Plan sponsors must plan accordingly.