401(k) Newsletter - Fourth Quarter
by Vita, on October 14, 2016
State of California Goes into the Retirement Savings Business
On September 30, 2016, the California State Legislature voted to create “California Secure Choice,” a state retirement savings program. For employers who already offer a 401(k) plan, other defined contribution plan, or defined benefit plan (cash balance plan), this legislation does not apply to you or your employees.
Employers of 5 or more employees, who do not offer an employer-sponsored retirement plan, will be required to administer employee deferrals into California Secure Choice. Unless they choose to opt-out, California workers at employers subject to the new legislation will be automatically enrolled at 3% of salary, with an annual auto-increase of 1% per year to a maximum of 8%. Initially, all contributions will be invested into US government securities.
The legislation “goes into effect” on January 1, 2017 but there is no indication of when the final details of the program will be completed. The deadline for applicable employers to implement the payroll deductions is between 12 and 36 months, based on the number of employees. Vita will monitor the implementation of California Secure Choice and further inform you as needed.
Form 5500 and 8955-SSA
For calendar-year plans currently on extension, Monday, October 17, 2016 is the deadline to file the Form 5500 and Form 8955-SSA. 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.
Annual Participant Notifications
As we wrap up 2016, we would like to remind you of some important annual notices that may need to be delivered to Plan participants, depending on the provisions of your Plan. Below is an outline of these notices, along with the corresponding due dates, based on a calendar-year Plan.
|Notification||Applicable Plans||Deadline to Distribute|
|Qualified Default Investment Alternative Notice||Plans with an assigned QDIA||December 1, 2016|
|2017 Safe Harbor Notice||Plans with a Safe Harbor provision||December 1, 2016|
|Automatic Enrollment Notice||Plans with an automatic contribution arrangement (automatic enrollment) feature||December 1, 2016|
|2015 Summary Annual Report||ALL retirement plans (note: this is the extended due date for plans that filed a Form 5558)||Decemeber 15, 2016|
View our online Compliance Calendar to see what other important dates are approaching.
As we are in the midst of the presidential election in the United States, two things are likely to happen: 1) the Fed will not raise interest rates at their November 1st – 2nd FOMC meeting and 2) the generally positive American economic news will be ignored by pundits and politicians pushing the perception of gloom in order to further their political agendas.
In stark contrast to the many voices of doom after the Brexit vote, global equity and fixed income markets over the summer after Brexit were mostly quiet and trading within narrow ranges. Markets sold off sharply in September on comments indicating the European Central Bank might start to wind back its quantitative easing and speculation that the Fed would raise interest rates at its September 20th meeting. Neither of these events came to pass and markets pulled back their losses. Historically, the Fed refrains from making any policy actions in the final stages of a Presidential election in order not to appear to favor either party, so the earliest there might be a US rate hike would be in December.
US economic data should be quite good over the next few weeks. Q2 GDP growth came in at 1.4% and is expected to pick up in the second half of the year. Expectations are for Q3 GDP growth to come in at between 2.5% and 3.0% with 2016 possibly finishing the year at between 2.0% - 2.5%. Unemployment is stable at 4.9%, and with the average of non-farm payroll growth over July and August coming back at a 200K monthly pace it is little wonder that unemployment benefit claims are at their lowest level since the 1960s. The tightening of the labor market is further evidenced by a continued rise in wages, up 0.2% in August, to an annual rate of 2.5%, and the first reported rise in US median annual income since 2007: up 5.2% in 2015 to $56,516. So, with the economy continuing to grow, unemployment and inflation low, and asset prices – housing and equities – rising, consumer confidence is higher than its long-term average, 91.2 vs 85.1, but nowhere near the most recent high of January 2015.
Despite the fact that we are in the midst of the second longest bull market in US history with solid, if unspectacular, US economic figures, there is an astounding $12.2 trillion sitting in cash (69.6% of nominal US GDP). Even with core CPI inflation running at a historically low 2.3%, this is a loss of well over 2% per year, $250 billion in lost purchasing power. Why are people staying out of the markets? Part of the reason must be the fear of a repeat of the 2007/08 market crash and recession. But another factor could be the fact that many people just aren’t hearing these figures. Research from the Pew Institute shows that in 1993, 63% of Americans got their news from one of the 3 major TV networks (ABC, CBS, and NBC); today only 27% of Americans get their news from those sources. What has replaced large network news are both free-to-air and online sources that have little pretense of even-handed reporting. Psychology does play a part in economic decisions and maybe all the political spin is having a detrimental effect on people’s willingness to believe and act on positive economic news.
We are now at the beginning of the Q3 US corporate earnings season. But will people hear the news that analysts are looking for a continued rebound, or that US corporate earnings rose in both Q1 and Q2? Estimates for Q3 earnings are running at over $29.00 per share in Q3, up from the $25.70 reported in Q2. Much of this is the result of decreased drag from energy prices and a strong dollar which adversely affected corporate earnings at the end of 2015. American bonds, both government and corporate, remain attractive for overseas investors chasing yield. And, while US equity valuations may be on the high side of historical levels, European and Emerging Markets would seem to have room to grow. It is impossible to say what direction the markets will take after the election, but fundamentals would still argue that a balanced portfolio of equities and fixed income is preferable to cash.