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401(k) Newsletter - First Quarter 2017

by Vita, on January 6, 2017



2016 Year-End Census Information Due Now! 
It's that time again!  Perhaps one of the most pressing compliance matters is the submission of census data to begin compliance testing.  Sponsors of calendar-year 401(k) plans subject to the Average Deferral Percentage (“ADP”) or Average Contribution Percentage (“ACP”) Tests (i.e. all Non-Safe Harbor Plans) must submit their 2016 census data now to ensure timely results and processing of any potential refunds. 

Be sure to submit your annual census data and compliance questionnaires to your recordkeepers by January 31st to ensure delivery of testing results before March 15th.  Any ADP refunds made after March 15th will be subject to a 10% employer excise tax.  Please contact Vita Planning Group if you have questions regarding your recordkeeper’s requirements.

For other important dates on the horizon, please check out our online Compliance Calendar.

401(k) News
And Now a Word from our Sponsors…the DOL and IRS
This quarter finds us with little in the way of 401(k) “News” that we haven’t already raised in previous newsletters. Instead, we thought we might remind you why submitting timely and accurate census information is so important: ultimately to help ensure your 401(k) plan is not audited by either the DOL or IRS!  

The two most common audit triggers are 1) complaints made to the DOL by 401(k) plan participants, and 2) Form 5500 filings, most notably the late payment of employee contributions.  One article recently published in PLANSPONSOR explores the key areas of concern for the DOL and IRS: “Both the DOL and IRS Are Stepping Up Their Audits”.

Market Update
The “Trump Rally”, which saw the S+P 500 Index hit an all-time high of 2,277.53 on December 13, 2016, seems to be a case of pricing in all the potential positives of a Trump Presidency while ignoring potential negatives.  Much is being made of President-elect Trump’s comments regarding increased fiscal spending on infrastructure, corporate tax cuts, and deregulation (e.g., ACA).  The positive impact of these measures on both GDP growth and corporate earnings have fueled the rally in equities.  However, one need go no farther than the US bond market to see the possible negatives associated with these anticipated policies.  The US 10 Year Treasury market sold off immediately after the election with the yield rising from 1.83% on November 7, 2016 to a high of 2.60% on December 16, 2016.  While part of that sell-off was due to the widely anticipated increase in the Federal Funds rate, the bond markets were also reacting to the monetary and inflationary impact of the new Administration’s talked-about policies.

Assuming that a fiscally conservative Republican Congress sets aside its espoused beliefs and does actually vote for the proposed infrastructure spending and tax cuts without offsetting spending cuts, the impact will most likely be a blow-out of the Federal debt.  The bi-partisan Committee for a Responsible Federal Budget estimates the Trump spending and tax proposals will cost $5.3 trillion over ten years, which could result in a rise in the Federal debt as a percentage of GDP from the current 77% to 105%.  The bond markets, and the Fed, are also reacting to the prospects for inflation in 2017.  The 2.3% year-on-year the rise in wages (as of November 2016) is seen as evidence of a tight labor market. With unemployment at 4.6%, the US is considered by many, including John Williams, Head of the San Francisco Federal Reserve, to be at “full employment”.  There has been much conjecture about whether the decline in labor force participation over the past 10 years is demographic, with the retirement of the baby boomer generation, or structural, with massive underemployment and unreported job-seekers.  An increase in fiscal spending will test if there really is an army of unemployed in the US waiting to get back into the workforce.  Even if there is, with virtually no corporate investment in capacity over the past decade an increase in fiscal spending will require large capital formation, likely to further fuel inflation.  Added to that is the prospect of a trade war.  If a trade war does eventuate, the result will most likely by a significant rise in the cost of both consumer and capital goods.

In 2017, the markets expect the Fed to continue the tightening of US interest rates in order to head off the threat of inflation.  This prospect should continue to be the dominant theme in the bond markets.  Corporate earnings are expected to improve into 2017, which should be generally supportive of equity prices.  However, at the most recent market high the S+P 500 forward P/E ratio was 17.3x, about half a standard deviation above the 25 year average of 15.9x.  For the US equity markets to maintain these multiples until earnings growth catches up, Congress will have to make the incoming Administration’s promise of increased fiscal spending and decreased taxes and regulation a reality.