401(k) Newsletter - Second Quarter
by Vita, on April 11, 2016
DOL Announces “New” Rules for Fiduciaries
After six years of drafting and consultation, the DOL announced its new ‘Final Rule’ on Fiduciary “Conflict of Interest – Retirement Investment Advice” on April 5, 2016. This Final Rule codifies that anyone giving investment advice to a plan, its participants or its beneficiaries is a fiduciary. It further stipulates that any “individual receiving compensation for providing advice … cannot accept any payments creating conflicts of interest”. The Final Rule is to be implemented in stages and to become fully in force on January 1, 2018.
We at Vita are somewhat bemused by all the attention that the Final Rule has received in the media over the past few years and by the angst in the retirement industry. To us, this Final Rule is really not something “new”. Section 3(21) of ERISA already states that anyone who gives investment advice is a fiduciary. Section 408(b)(2) requires all compensation paid to retirement plan service providers by a plan sponsor and its participants be disclosed. Furthermore, the plan sponsor must determine that the fees paid are “reasonable” and that there are no conflicts of interest. It would seem the DOL Final Rule is primarily focused on bringing retail retirement advisors (particularly IRA advisors) into line with regulations that Vita and our clients already adhere to.
We will be hosting a webinar on the Final Rule on Wednesday, April 27, 2016 at 12:00 PM PDT. This will give us a chance to thoroughly read all 208 pages of the DOL’s Final Rule and to ascertain what, if any, effects the Final Rule will have on you and your plan. Please watch out for details of our webinar.
Verisight Changes its Name to Newport Group
Some of our large plans have used Verisight (formerly Pension Specialists) as their third party administrator. As of March 31, 2016, Verisight, Inc will be known as Newport Group. The Newport Group is a conglomeration of a variety of retirement plan service providers, insurance brokers, and benefits consulting firms. Our understanding is that the TPA services, formerly known as Verisight, will continue to operate as a separate business entity within the Newport Group. In addition, the Verisight Trust Company will be rebranded as the Newport Trust Company.
Large Retirement Plans: Start Scheduling your Independent Audit
Now that census data has been submitted and testing completed for calendar year retirement plans, steps should be taken toward completion of the annual independent audit. The independent audit report must be included with the Form 5500 filing.
The independent audit requirement applies to employers who sponsor “large” plans – those with over 100 participants. Special attention should be paid to the IRS definition of “participant,” as it does include all employees who are eligible to participate in the Plan, not just those who are actively contributing. The definition also includes former employees who still have balances in the Plan.
There are special rules that allow for growing plan sponsor companies to first exceed 120 participants before becoming subject to the audit requirement, and thereafter continue being subject to the requirement while staying above the 100 participant threshold. Please contact Vita Planning Group to learn more about the rules surrounding the independent audit requirement.
View upcoming employer deadlines and action items in our Second Quarter 2016 Compliance Calendar. Dates and events illustrated are examples for a retirement plan with 12/31 year-end.
The two most significant developments affecting markets in the first quarter of 2016 were the weakening of the US dollar and the weakening resolve of the Fed to raise interest rates. The US dollar experienced its largest quarterly drop since 2010. The Bloomberg Dollar Spot Index, which tracks the US dollar against 10 major currencies, dropped 4.1% in the first quarter of 2016. Over the course of 2015, the dollar’s 10% rise coupled with the fall in oil prices put a damper on US corporate earnings, particularly S+P 500 firms, as well as returns from commodities and emerging market equities. So far this year, the dollar’s weakness and the stabilization and rise in the price of oil has eased the headwinds that weighed on many of those asset classes. The MSCI Emerging Markets Index rose 5.7% in the first quarter; the S+P 500 Index rose 1.3%; the Barclays High Yield Bond Index rose 4.1%. Much of the weakness in the dollar thus far in 2016 is the result of the market’s expectation that the Fed would back away from its original timetable of raising the Fed Funds rate every other Open Market Committee (“FOMC”) meeting during 2016 and 2017. The slower pace now envisaged for the Fed’s rate hikes should ease pressure on the US dollar and those assets classes adversely affected by it.
Both bond and equity prices in the US rose in Q1 2016. The S+P 500 index hit a low of 1,829 on February 11th but was at 2,045 at the beginning of April. The BarCap US Aggregate Bond Index, which is comprised mostly of US government and investment-grade corporate bond funds, rose 3.0% in Q1. The markets can’t seem to work out whether things are getting better or getting worse. If the slowing Chinese economy, low oil price and strong dollar are such a drag on the global economy then why did equity prices rise? If the prospect of a weaker dollar, stabilizing oil price and improved US corporate earnings are so good for the global economy then why did bond prices rise? About the only thing that is clear is that all the world’s central bankers appear to be frustrated by the same “supply side” issues: slowing productivity growth and falling labor force participation. Those are the two long-term factors that seem to be creating the “new mediocre”, as IMF Head Christine Lagarde described global economic growth this week.
Yet if one looks at the economic data, perhaps things are not all that bad. Yes, US GDP growth in the Q1 is expected to slow and perhaps turn negative, but there does not appear to be a serious prospect for a recession in 2016. Estimates for 2016 US GDP growth are around 2% and there seems to be no dampening of consumer demand. Even as ‘slow’ as US GDP growth is, it has been growing fast enough to keep unemployment at or below 5%, absorb 2.5 million new workers in the past six months alone and begin to push up wage growth. As pessimistic as European policy makers seem to be, Q1 European GDP growth is rising and is expected to come in at an annual rate of 2% for 2016, up from 1.8% in 2015. At 10.3%, EU Unemployment remains high, but this is down from 11.2% a year ago, and falling. The strong dollar and weak oil price is a boon to European economic prospects, as is the pent-up demand by European consumers for housing and vehicles. Even China seems to be stabilizing. Purchasing manager’s indices for goods and services are rising, which has a positive knock-on effect for Asian emerging markets, particularly Korea and Taiwan, which are large exporters to China. The Chinese government has the resources and the apparent will to maintain economic growth and to mitigate the threat of a debt crisis among Chinese companies and the banks.
It seems a confused picture with only modest prospects for asset growth in 2016. What is clear is that central banks will keep pouring liquidity into the market, keeping bond yields low. This means equities are still more attractive on a relative basis. And, the $12 trillion now in cash in the US will lose 2% per year in real terms. As paltry as the alternatives may appear, at least they are positive.