How Safe is Your 401(k) Plan’s Money Market Fund?

Money market funds have always provided refuge from the storm in a market crisis, but CFOs who have fiduciary responsibility for their company’s 401(k) plan may be questioning the safety of their plan’s money market fund these days. Many of the funds hold commercial paper and other short-term debt instruments tied to ailing financial powerhouses such as Lehman and AIG. And the seemingly unthinkable has already happened: one large money market fund, the Reserve Primary Fund, announced that it lost capital due to the Lehman securities it held, breaking the sacred $1 per share net asset value (NAV). This marks the first time that a money market fund “broke the buck” in 14 years, according to The Wall Street Journal. S & P subsequently put nine other money funds sponsored by the company on credit watch for possible downgrades.
Fortunately for worried plan participants who have heard about Reserve’s losses on the evening news, the problem is highly unlikely to spread to funds sponsored by major asset management firms, according to a report by Morningstar director of fund analysis Karen Dolan, CFA. The reason, she says, is that large firms that have the financial wherewithal to inject their own money to keep a stable $1 NAV will do so if necessary because of the damage a failed money market fund can have on their future business. Reserve, which only offers money funds, didn’t have cash from other business lines to prop up its troubled fund. In fact, she points out, Fidelity released information on its homepage assuring that maintaining a $1 NAV is a top priority; other fund firms are also posting information on their sites regarding money market fund holdings in troubled companies.
S & P says that with the exception of funds sponsored by Reserve, the other 500 or so money funds it rates aren’t vulnerable to specific damage related to Lehman. But if the rating agency’s take on the situation makes you feel warm and fuzzy, consider this: Due to credit-ratings firms’ failure to sound alarm bells relating to the subprime mortgage mess, The SEC is proposing that the boards of money market funds should be responsible for determining credit risk in their holdings. Fund directors, however, say they aren’t qualified to act as credit-ratings firms and believe that improvements in the credit ratings process can better address the SEC’s concerns. If this sounds to you like the SEC is trying to “throw out the baby with the bathwater” a comment letter might be appropriate.