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401(k) Newsletter - Second Quarter 2017

by Vita, on April 10, 2017


401(k) News
DOL Delays Fiduciary Rule
On April 4, 2017, the Department of Labor announced it will be delaying the implementation date of its ‘Final Rule’ on Fiduciary “Conflict of Interest” for 60 days — from April 10, 2017 to June 9, 2017.  The DOL concluded that the delay is necessary in order to conduct a careful review of the rule, as directed by President Trump in February 2017.

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”.

Whether or not the Final Rule is implemented as originally planned has no impact on the guidance Vita provides on the operation, oversight, and participant education of your Plan. Vita has always operated within the guidelines of the Final Rule by accepting our fiduciary role as adviser to our 401(k) plans, being a level-fee service provider, and not selling any individual investment products.

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 if you have questions about whether the independent audit requirement applies to your Plan.

View our online Compliance Calendar to see other important administrative tasks.

Market Update
Fundamentals Catch Up with Trump Rally

2017 Q1 saw continued strong US equity and fixed income markets as fundamentals have begun to catch up with the optimism over the Trump Administration’s policy goals of infrastructure spending, tax cuts, and deregulation. The markets shrugged off the Administration’s first policy defeat, the failed attempt to repeal Obamacare.  The biggest challenge for the Administration in the coming quarter will be convincing those same fiscally conservative Republicans that were against its healthcare reforms to support increasing infrastructure and defense spending, while cutting personal and corporate taxes thereby increasing the federal debt, which they staunchly opposed during the Obama Administration. 

In the first quarter of 2017, US economic growth, falling unemployment, and increased corporate earnings have caught up with the “Trump rally” in equities begun at the end of 2016.   2016 Q4 GDP growth was revised up from 1.9% to 2.1%.  This was lower than the final revision of 2016 Q3 spike in growth of 3.5%, but in keeping with the average annual growth rate for the current economic expansion begun in 2009.  There could be some reacceleration of growth in 2017 due to strong consumer spending, improved housing markets and increased government spending, as outlined in the draft federal budget.  However, initial estimates for 2017 US GDP growth remain at or below 2.5%. Much of this economic growth is the result of job growth and the US unemployment rate continues to fall.  The unemployment rate hit 4.5% in March.  Should 2017 GDP growth come within expectations, unemployment rate should fall to 4% by Q4 2017.  A tighter labor market should result in a rise in wage growth as well, especially if the Administration is successful in limiting immigration and increasing infrastructure spending.     

Low unemployment and wage growth adds to consumer confidence and spending, helping economic growth, but also adds to inflation, which is beginning to rise.  Energy prices have bottomed out and should continue to rise in 2017. This will push the overall inflation rate above the core rate (excluding food and energy) early in 2017 for the first time in two years.  Core inflation will also rise due to wage and rent increases.  Both of these measures of inflation, as well as the Fed’s preferred personal consumption expenditure deflator, should move above 2.0% sometime early this year. This is largely what has motivated the Fed to raise interest rates in the first quarter of 2017, with at least two more rate increases expected later this year.   

Overseas markets have been gathering momentum despite the political turmoil of Brexit and the doggedly high unemployment rates in Europe.  The Chinese economy has picked up which has helped emerging markets in Asia. Rising commodity prices help primary producers in Brazil and Russia.  Emerging markets equities were the best performing asset class in Q1, rising 11.4% (MSCI EM Index), followed by overseas developed market equities, up 6.81% (MSCI World ex.US) and finally US equities, up 6.07% (S+P 500).  

Corporate earnings rebounded in 2016, overcoming the adverse effects of a rising dollar and depressed commodity prices.  Corporate earnings are expected to continue to rise in 2017, which should be supportive for US equities.  By how much will, in part, be determined by the extent of corporate tax rates cuts promised by President Trump.  US government bonds yields did rise at the end of 2016, but real yields (nominal yield minus inflation) remain well below historical averages.  On a relative basis, this argues for a continued overweight in equities over bonds or cash, even as we enter the 8th year of the current economic expansion.