Schwab Retirement Technologies, Inc. Schwab RT Recordkeeping Money Market Fund Break a Buck User Guide
User Guide December 27, 2011 The material contained herein is proprietary to Schwab and for informational purposes only. The information is not intended to provide tax, legal or investment advice. Schwab does not guarantee the suitability or potential value of any particular information source. Certain information presented herein may be subject to change. The information or material contained in this document may not be copied, assigned, transferred, disclosed or utilized without the express written approval of Schwab. The Charles Schwab Corporation (Schwab) provides services to retirement plans and participants through its subsidiaries: Charles Schwab & Co., Inc. (Member SIPC), Charles Schwab Bank, Schwab Retirement Plan Services, Inc., Schwab Retirement Plan Services Company and Schwab Retirement Technologies, Inc. (Schwab RT). Schwab RT is engaged in developing and licensing proprietary retirement plan recordkeeping systems to independent Third Party Administrators. Schwab Personal Choice Retirement Account (PCRA) is offered through Charles Schwab & Co., Inc., the registered broker/dealer, which also provides other brokerage and custody services to its customers. For further information, contact Schwab Retirement Technologies, Inc. at 4529 Sharon Road, Charlotte, NC 28211, USA. Web site: schwabrt.com. 2011. Schwab Retirement Technologies, Inc. All rights reserved.
Contents Table of Contents Introduction...4 Part 1: Suspension and Liquidation...5 Part 2: Reclassification...9 Part 3: Additional Information...10 MMF Flow...11 Schwab Retirement Technologies
Introduction The following guide is intended for Schwab RT clients who could potentially be impacted by SEC amendments that regulate money market funds (MMF). The SEC designed these amendments to improve the quality, liquidity and stability of money funds, as well as to ensure that, if necessary in extreme market conditions, money market funds can be suspended and redeemed in an orderly fashion that protects investors. By informing you of these changes, we hope to prepare you to respond quickly in the event a money market fund, including a Schwab money market fund, is not able to maintain a stable $1 NAV and will be suspended and redeemed. This is commonly referred to as breaks the buck. In the unlikely event that this takes place, Schwab would notify you immediately and provide directions as to which action clients are expected to take. There are three directives that apply. Suspend and Liquidate a Sweep money market fund in the event that a MMF breaks a buck. Suspend and Liquidate a Purchased money market fund in the event the MMF breaks a buck. Reclassification of a Purchased money market fund in the event that a MMF breaks a buck. The affected fund may be immediately reclassified as a Fluctuating NAV (Net Asset Value) fund. No changes were required to the Recordkeeping system to handle the MMF Break a Buck solutions. Schwab RT Recordkeeping can support the above actions through manual intervention of our clients to satisfy the amendment changes that go into effect October 31, 2011. Disclaimer The guidelines documented here are high level discussion points to help generate awareness to the potential impact of an MMF breaking a buck in regards to the Schwab RT Recordkeeping system. They are not intended to replace any internal processes / procedures you have in place today. This document is a guide or starting place to help determine what areas need monitoring and changes that may be needed in the event a MMF breaks a buck, but should not be considered allinclusive. Although this document was created around a hypothetical scenario involving a Schwab MMF, the general ideas and recommendations should apply to any MMF that you may be using on the Schwab RT system. We can provide no information regarding the notification or instructions that may be provided by other MMF providers. December 27, 2011 Schwab Retirement Technologies Page 4 of 11
Part 1: Suspension and Liquidation In the event that the money market fund that broke a buck is going to be suspended and liquidated, then the following scenarios need to be monitored. Scenario 1 The money market fund is a PCRA sweep fund (trust and custody clients) The money market fund that broke the buck will be suspended. The fund will now show as a position in the account with the PCRA showing no liquidity on Schwab RT. The PCRA will continue to show no liquidity on Schwab RT until a new sweep fund is assigned. What this means 1. Money Movement from PCRA account (Examples: loans, distributions, and fees) will not have liquidity available to perform transactions. 2. Money movement to PCRA (Example: contributions) can continue, though the cash will remain un-invested until a new sweep fund is established. 3. In-flight PCRA sale of the sweep MMF transactions triggered by the purchase request of another fund may be impacted depending on the timing of suspension, which could cause a potential overdraft situation. 4. Schwab will liquidate the suspended Sweep PCRA fund based on a schedule; it will not be a total liquidation on Day 1. The assigned portion to that account will be prorated back accordingly. 5. The timing is unknown for when the total liquidation will be completed. 6. The timing is unknown for replacement of the sweep fund. Schwab RT Recommendations 1. Monitor the Balance and Position file (.BPC file) a. The suspended fund will show as an asset with the word suspended. b. The balance is included in data field Cash 19. c. The liquidity value in data field Cash 07 will show as $0.00 until a new sweep fund is assigned. 2. Watch for overdrafts notification. December 27, 2011 Schwab Retirement Technologies Page 5 of 11
Scenario 2 The money market fund is a plan sweep fund (custody clients) The sweep fund that broke the buck is suspended and shows as a position in the plan. There is no longer any liquidity associated with the sweep fund. What this means 1. Money Movement from the sweep fund is not allowed (Examples: loans, distributions, and contributions). 2. Money received for the plan is accepted but not swept to the sweep fund until it is replaced with a new fund. 3. Schwab will liquidate the suspended fund based on a schedule; it will not be a total liquidation on Day 1. The assigned portion to that account will be prorated back accordingly. 4. The timing is unknown for when the total liquidation will be completed. 5. The timing is unknown for replacement of the sweep fund. Schwab RT Recommendations 1. Monitor Custody Position file (csmmddyy1.bld file) 2. Suspended fund will show as an additional asset in the plan. 3. Monitor the Error report for a fund included on the file that is not a fund of the plan on SCHWAB RT. 4. Monitor the CSBD CashRecon file for cash created as the frozen MMF is liquidated. 5. Monitor the SCS transaction file for sales of the sweep fund with no corresponding order. This will be an indicator that a portion of the liquidation has been allocated. December 27, 2011 Schwab Retirement Technologies Page 6 of 11
Scenario 3 The money market fund is a position traded fund (core MMF- trust and custody clients) The core fund is suspended and will no longer be available for trading purposes, effective immediately. What this means 1. The suspended core fund is frozen and no longer available. a. Money Movement from the suspended core fund is not allowed. b. Money Movement to the suspended core fund is not allowed. c. Total Distributions cannot include the suspended core fund. 2. Need to select a Replacement Fund. (You may want to be proactive in selecting a replacement so trading is not interrupted.) 3. The suspended core fund will be liquidated based on a schedule; it will not be a total liquidation Day 1. The assigned portion to that account will be prorated back accordingly. a. Timing is unknown for total liquidation schedule. b. When liquidated, the trade file will contain a sale for the liquidation of the core fund. c. This transaction will fail since there is no corresponding order. d. Information of the transaction (units, cash, price) can be used to process the liquidation on Schwab RT. 4. There are potentially trading / reconcilement issues with the Core Fund. a. In-Flight Purchases may cause trades to be rejected, un-invested cash to occur, and may result in reversals. Keep in mind that to correct these issues, you may need to correct by purchasing into other funds, if applicable. Or for Transfers; may need to purchase back into what was sold. b. In Flight Sales may cause trades to be rejected, overdraft, and impact reversals may result in reversals. Additional sale transactions may be needed from other Core funds, if applicable, to cover the transactions not processed for the suspended core fund. c. Correction to Checks. December 27, 2011 Schwab Retirement Technologies Page 7 of 11
Schwab RT Recommendations 1. At an Investment level, change the following on the core fund: a. Pricing characteristic from Dollar Par to Fluctuating NAV. b. Set unit precision to 4. c. Optional change characteristic from a MMF to a Bond Fund. d. Remove trade links (and overrides) from the core fund. 2. Monitor outbound trade files for core fund and remove any reference. a. Trades would potentially be rejected if not removed. 3. Follow current Replacement Fund process with the exception of the liquidation step: a. Investment level i. Zero investment caps on suspended core fund. ii. Zero investment elections on suspended core fund. iii. Remove suspended core fund from hierarchies. iv. Add Replacement Fund to plans, if necessary. b. IPM/Portfolio level i. Zero percentage for the suspended core fund. ii. Add Replacement Fund to IPMs and portfolios, if necessary. iii. Review automated IPM rebalancing schedule and suspend, if necessary. iv. If Plan Sponsor/Investment Manager has not identified a replacement fund in a timely manner, consider one of the following actions: 1. Shut off the IPM by removing investment caps and other necessary changes normally required to shut off an IPM. 2. Consider moving the MMF holdings out of the IPM to a core fund. v. If Plan Sponsor has identified a Replacement Fund or reallocation. 1. May not need to change the investment election and transfer purchase percentage caps since purchases are based on allocation percentages. 2. Since IPMs sell on a pro-rata basis, may need to remove or maintain the transfer sale, distributions and loans caps setting until the suspended fund is liquidated fully and the suspended fund has been mapped to a replacement fund. 3. Consider moving the frozen MMF out of the IPM to a core fund. 4. Monitor any in-flight transactions and take action to correct any issues regarding the replacement of the fund. 5. Monitor any pending batches and take action regarding the replacement of the fund (i.e. Purge batches or hold until liquidation is complete.) December 27, 2011 Schwab Retirement Technologies Page 8 of 11
Part 2: Reclassification In the event that the money market fund that broke a buck is reclassified, then the following scenario needs to be monitored. Scenario 1 The money market fund is a position traded fund (core MMF) (trust and custody clients) that will be reclassified The core fund is reclassified as a fluctuating NAV for trading purposes, effective immediately. What this means 1. Money Movement from the core fund is still allowed. 2. Money Movement to the core fund is still allowed. 3. There will be potential trading / reconcilement issue with the Core Fund. a. In Flight Sales - Additional sales may be needed from Core funds to make up shortage. b. Correction to Checks. c. Trades that were sent with a unit precision of 2 may not settle when the confirmation file has a unit precision of 4. Manual intervention may be required. Schwab RT Recommendations 1. At the Investment level, change the following on the core fund: a. Pricing characteristic from Dollar Par to Fluctuating NAV. b. Set unit precision to 4. c. Optional change characteristic from a MMF to a Bond Fund. d. Optional change the Other Features Money Market Fund to Variable Fund. 2. Monitor any in-flight transactions to correct any issues resulting in sales for a lower price with the core fund. 3. Monitor the CSBD Cash Recon file for cash created with the core fund. 4. Monitor trade files to correct any issues with the core fund. December 27, 2011 Schwab Retirement Technologies Page 9 of 11
Part 3: Additional Information The following are additional areas to monitor in the event a MMF breaks a buck. Reconciliation Issues The timing of the liquidation process for funds is determined by Schwab. Clients will need to monitor the Confirmation files and the Cash Reconciliation Reports for trades of the fund in relation to liquidation. To Schwab RT s knowledge, there is no other notification provided about the liquidation. Please note that the redemption on the entire fund will be processed pro-rata. If, at the time of suspension, there are In-Flight Transactions existing, monitor for the following circumstances: 1. Extra cash as well as cash shortages. 2. Checks that need to be cut. 3. Follow up on distributions that were not fully processed. Stock Liquidity Issues If the stock liquidity fund is a Schwab MMF, there is a potential impact to those funds as well to break a buck. In this scenario where the Schwab MMF breaks a buck, monitor for the following situations: 1. If the MMF is suspended and liquidated, then the liquidity could go to $0.00. 2. If the MMF is reclassified, then the liquidity could be less than expected. December 27, 2011 Schwab Retirement Technologies Page 10 of 11
MMF Flow December 27, 2011 Schwab Retirement Technologies Page 11 of 11