401(k) Update - Third Quarter 2018
by Vita, on July 9, 2018
Form 5500 Season – Ready, Set, File!
It’s that time of year again! For calendar year plans, the 2017 Form 5500 and Form 8955-SSA (if applicable) must be filed by July 31, unless an application for extension has already been submitted. In most cases, the extension will be automatically prepared and filed by your retirement plan service provider on your behalf. If you are unsure as to the status of your Plan’s Form 5500 or Form 8955-SSA, you are invited to contact our team for assistance.
View our online Compliance Calendar to see other important administrative tasks.
Guidance on Locating Missing Participants
The issue of plan sponsors contacting missing or unresponsive 401(k) plan participants has come back to the fore. In January 2018, The Government Accountability Office (“GAO”) issued a report recommending that the DOL and IRS provide guidance on plan sponsor responsibility in finding missing participants. The Plan Sponsor Council of America (the leading 401(k) industry body) has reported increased enforcement during Department of Labor (“DOL”) audits on how plan sponsors handle the issue. At the very least, this is a good reminder that plan sponsors need to be vigilant in trying to locate missing participants.
At Vita, we make this part of our regular Plan & Investment Review process. The “Un-cashed Checks” section of the Vita Plan Review document is the primary method of identifying missing participants. Once identified, we follow a three-step process to find these participants: 1. we work with HR to check for any current contact information, 2. we then utilize the resources of the plan’s recordkeeper to check for any direct or indirect information (e.g. telephone number or beneficiary record), 3. finally, we use the locator service “BeenVerified” to locate missing participants. This process helps ensure proper due diligence is being taken and that appropriate steps are in place to locate missing participants.
Q2 2018 saw very little change in the underlying trends moving markets from the beginning of the year. Markets remained volatile, the US economy moved ahead strongly, the Fed continued to raise interest rates and concern over the beginnings of a trade war lingered. This translated into a positive second quarter for US equity markets, continuing struggles in US bond markets and international equity markets hit by investors looking for safe havens. The S+P 500 was up 3.43% in the second quarter, resulting in a year-to-date (“YTD”) rise of 2.65%. The BarCap Aggregate US Bond Index was down 0.16% for the quarter and down 1.62% YTD. Emerging Market equities went from being the best performing market sector in Q1 (up 1.5%) to the worst, falling 8.3% in Q2, causing the MSCI All World Country Index (“AWCI”) ex-US to lose 3.77% YTD. All of this has led commentators to increasingly talk about the next recession and fall in equity markets. While no one can predict when the next US recession will begin, it seems highly unlikely that will be in 2018.
US economic fundamentals continue to be very strong. Q1 2018 US GDP growth was 2.8% year-on-year (“YOY”), and Q2 growth looks to come in well over 3.0% YOY. This is well above the 2.2% average annual GDP growth of the current expansion. Much of this is the result of tax cuts and fiscal stimulus enacted at the beginning of 2018 and which is expected to continue to play out for the rest of the year. The strength of the US economy is also shown in unemployment with the jobless rate falling to 3.8% in May, the lowest figure since December 1969. This has led to an increase in inflation with the Consumer Price Index rising to 2.7% in May, a rise in wage growth of 2.8% and rising oil prices. So while it is understandable that investors look for the end of this expansion, now the second longest in US history, it is more likely for that end to be in in 2019 or 2020.
Against this background of a heated economy is the Fed which is trying to cool things down, or “normalize” monetary policy as it euphemistically likes to describe its raising of interest rates. All the economic indicators that the Fed uses to determine a tight monetary policy (GDP, unemployment and inflation) have reached their targets. So we take the Fed at its word when it says it will raise short-term interest rates twice more in 2018 and at least three times in 2019. This means a Fed Fund rate of 2.38% by the end of 2018 and 3.13% at the end of 2019. The result has been a flattening of the US Treasury yield curve, with 10 yr. Treasuries yielding 2.9% at the end of June 2018 and 30 yr., 3.0%. Far from being a harbinger of recession, as some pundits like to profess, this is actually the reality of continued strong international demand for US Treasuries in the face of rising trade tensions.
Overseas equity and bond markets have been quite hard hit by the uncertainty regarding global trade and tariffs. When times are uncertain, investors prefer the safe haven of US dollar equities or bonds. This has resulted in a rising dollar in the second quarter, underpinned demand for US Treasuries and helped US equity prices. While overseas equity markets have been a negative for most US dollar based investors in Q2, we still believe that overseas valuations and earnings growth potential argue for the inclusion of overseas risk assets in a balanced portfolio. While many are anticipating the US economic expansion to run out of steam in the short-term, economic growth and structural factors (rising middle class and younger populations in emerging economies) may mean that the expansion in overseas economies is just beginning.