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| ||Replacing One Money Market Fund with Another? Risky Business! |
4Q 2015 Stable Value v. Money Market Funds Performance Review
Before we get into the current economic and legal environment for Stable Value and Money Market funds, let's see how returns compared for the fourth quarter of 2015. Stable Value options have continued to outperform Money Market Funds. The chart below compares the growth of $100 invested in stable value and money market for the ten year period ending 12/31/2015 in constant dollars. In nominal terms, $100 invested in stable value would have grown to $137.69, but in money market only to $111.98.1 Stable value has now outperformed money market for 37 consecutive quarters.
|Accumulated Value in Constant Dollars || || ||Stable Value |
| || ||Money Market |
The Federal Reserve finally pulled the trigger in December and raised the Federal Funds Rate by 25 bps. Furthermore, the Fed projected that there would be an additional four rate hikes in 2016. However, the significant market volatility that followed the Fed decision has many doubting that the Fed will hike much more in 2016. Yields on Treasury notes have dropped across the curve since the December move. The CME Group's Fed Futures market is currently putting the probability of no rate hikes in 2016 at over 70%.2 With the likely continuation of the low interest rate environment, stable value's outperformance of Money Markets should continue.
The Fed hike has actually been a source of relief for money fund managers. Since the start of the zero interest rate policy in 2009, Money Market Funds have granted billions in fee waivers. As money market portfolio yields inched up in 2015, the amount of fees waived dropped. After waiving $6.3 billion in fees in 2014, fee waivers declined to $5.5 billion in 2015.3 While the actual long term impact of the December rate hike on money market yields remains to be seen; according to the Crane MFA broad average, early indications show that money market funds are only passing 58% of the increase on to investors.4
|Period || ||Nominal Return || ||Real Return6 |
| ||Consumer |
|1 Year (Annualized) || ||1.93% ||0.02% || ||0.73% ||1.19% ||-0.71% |
|3 Year (Annualized) || ||1.83% ||0.02% || ||1.00% ||0.83% ||-0.97% |
|5 Year (Annualized) || ||2.25% ||0.02% || ||1.54% ||0.70% ||-1.49% |
|10 Year (Annualized) || ||3.25% ||1.14% || ||1.86% ||1.37% ||-0.70% |
As 2015 drew to a close, a new class action suit against Anthem's 401(k) plan not only alleged excessive fees, but additionally claimed that the plan sponsor breached its fiduciary duty by offering a “microscopically low-yielding” money market fund instead of stable value.7 The complaint stated that the failure to offer a stable value fund cost plan participants more than $65 Million in investment earnings.8 With money market yields likely to stay at low levels, there is a significant risk that similar suits will be brought against plans offering money market but not stable value options.
The historical performance of stable value funds vs. money markets certainly supports consideration of stable value options. However, now, more than ever, plan sponsors who do not are not only impairing the retirement income security of participants who value safety of principal, but are also opening themselves up to potential litigation.
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| ||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 http://www.imoneynet.com. |
3. Volz. “Fed Hike a 'Lifeline' for Money Funds, Waivers Drop to $5.5B” Ignites.
4. “MMF Yields Higher, Spread Returns; Outflows Ahead?” Money Fund Intelligence 11 (Feb. 2016): 1. CraneData.com.
5. CPI Index used is the US CPI Urban Consumers Index from Bloomberg.
6. Real return calculated by (1 + Nominal Return)/(1 + CPI) - 1.
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