An FDIC-Eligible Cash Deposit Option
The yield of a money market fund or stable value fund is typically top of mind for a fiduciary when selecting which capital preservation fund to utilize in a retirement plan. But in today’s world of floating NAVs, liquidity fees, and suspension gates, the yield of the fund isn’t the only impact that choice will have on cash held in participant accounts.
DepositxChange® is an American Trust Custody multi-bank, cash deposit option that functions like a daily accrual money market mutual fund inside a retirement plan. Unlike a money market fund, however, DepositxChange® is an FDIC-eligible product that comes without any liquidity fees and suspension gates, making it an ideal alternative to money market funds, stable value products, and single bank deposits in 401(k) plans.
The Need for Alternatives to Money Market Funds
DepositxChange® was launched by American Trust Custody out of the money market reform measures that went into effect in October 2016. Those regulations created a fundamental change to money market funds — requiring some funds to move from a fixed $1 share price to a floating NAV. In addition, the board of directors for these money market funds were also given the discretion to impose liquidity fees and redemption gates on prime and tax-exempt funds to reduce the flood of redemptions during a liquidity crisis.
While these changes intended to enhance the stability and resilience of all money market funds in times of extreme volatility, the measures introduced the risk of principal where it historically did not exist before.
An Automated Multi-Bank Deposit Program
Within the DepositxChange® product, American Trust Custody maintains a network of participating banks — generally five to ten banks depending on market conditions – and automatically manages the deposits across the banks in the program. Each participating bank sets its own interest rate, and American Trust Custody blends those interest rates and makes DepositxChange® available as a plan investment choice to 401(k) providers.
Because funds allocated to DepositxChange® are bank deposits, each participant is eligible for up to $250,000 of FDIC insurance per bank in the program, providing multiples of FDIC insurance as compared to single bank deposit coverage. For example, if six banks are participating in DepositxChange® at a given time, each participant would be eligible for up to $1,500,000 in FDIC insurance, subject to the participant’s other balances that might be held at those institutions.
With DepositxChange®, daily liquidity is available to participants. There are no minimums, no redemption restrictions, and deposits will not be affected by the regulatory changes impacting money market mutual funds over the coming years.
To assist the plan fiduciaries, American Trust Custody provides an online listing of DepositxChange® banks with various data points to assist in monitoring the program. The listings include performance and other investment data used by many plan advisors to assist with investment selection and monitoring. Additionally, American Trust Custody provides participant fact sheets to help with participant education and to fulfill necessary regulatory disclosure requirements.
Deposit Management Program I
Deposit Management Program II
Deposit Management Program III
How DepositxChange® Stacks Up vs. Stable Value Funds
The yield on stable value funds is typically what makes them so attractive to investors. But, of course, that yield also comes at a cost — typically in the form of reduced flexibility in liquidation access. Most stable value funds come with put periods of 12 months or longer, restricting the ability to redeem the plan’s investment, as well as limitations that prevent investors from moving their money directly into a similar investment, such as a money market. DepositxChange® provides the ability to trade in and out on a T+1 basis, providing maximum flexibility in terms of inflows and outflows of investments.
DepositxChange® Seamlessly Integrates With Recordkeeper’s Operations to Money Market Funds
From a daily processing perspective, DepositxChange® operates similarly to a daily accrual money market mutual fund. American Trust Custody handles all of the networked bank sub-accounting and allocations, so each plan only has a single position to process. Each deposit program carries a unique security identifier, provided by American Trust Custody. The recordkeepers communicate the deposit and withdrawal information as normal purchases and redemptions in the existing trade file with American Trust Custody, and the transactions will settle T+1 with the rest of the trading activity.
From a valuation and income perspective, recordkeepers receive a daily price of $1.00 with an accompanying accrual factor. The interest earned will be deposited to the plan’s account as a reinvested dividend on the last day of the month. At this time, a reinvestment record with accrual start and end dates is provided in order to allocate the interest to the correct applicable participants. And the best part is that DepositxChange® will work within existing processes with no necessary system changes.
Benefits of DepositxChange® for Bank Depositories
Access to participant-level deposits
- The DepositxChange® platform provides Bank depositories with potential access to participant-level deposits from over 100,000 retirement plans, representing millions of participants serviced by American Trust Custody.
Cash options in retirement plans
- Cash options in retirement plans typically remain relatively stable, with incremental growth, and generally are considered “core” deposits for reporting purposes. The stability comes from the diversification across thousands of beneficial owners who are viewing the deposit generally as an allocated percentage of an overall investment plan. The incremental growth comes from the beneficial owners, in many instances, making automatic deposits each payroll period.
Improved operational efficiencies
- From an operations perspective, DepositxChange® is simply one net wire a day between American Trust Custody and the bank. Then, on the last day of the month, the bank just deposits the interest for that period based on its published rate. American Trust Custody, in conjunction with our recordkeeping partners, will handle all of the participant-level deposits/withdrawals, income allocation, daily balance maintenance, and plan cost offset payments.
Simplified net rate
- American Trust Custody deducts its platform administrative fees, as well as any revenue-sharing elected to be retained or utilized to offset plan expenses by eligible plan service providers, from the gross interest rate provided by the bank, thus providing a simple net rate to the plan and its participants.
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