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Investing for Retirement: a Marathon, not a Sprint

Like millions of people around the world, we look forward to the Summer Olympics. Every four years, we get to see some of the most committed and talented athletes compete for the love of sport and eternal Olympic glory. Olympic athletes provide a seemingly endless array of analogies to help us better understand investing and saving for retirement. For example, take the 100-meter Sprint and the Marathon. Both are running events, but the training required for each endeavor is very different. Sprinters train for speed and strength over a short distance, while marathoners train for endurance and stamina over a long distance. When it comes to saving for retirement, we are marathon runners.

Just like training for a marathon, investors are running a race that requires planning and endurance to manage the highs and lows along the way.

Thus far in 2022 we have seen a perfect storm of factors wreaking havoc on the markets (and our 401(k) accounts!): inflation, rising interest rates, war in Europe. Place these three items against the backdrop of the COVID pandemic and mid-term elections in the US and we get extreme volatility. There is a silver lining to this dark cloud, however. Consider the immortal words of legendary investor Warren Buffett: “In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”

Now is the time to stay the course! Investors should continue to save and take advantage of the current low prices the market is offering. As they draw closer and closer to the finish line, they’ll be glad they did.

As a reminder, our team at Vita is available to support your plan participants with their retirement planning questions and can be reached at planning@vitamail.com or by phone at (650) 567-9300.
 

Administration

Form 5500 Season

For calendar year plans, the 2021 Form 5500 and Form 8955-SSA (if applicable) remains due July 31, 2022, 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 and the extended filing deadline is October 17, 2022. If you are unsure as to the status of your Plan’s Form 5500, please contact our team for assistance.
 

Independent Audit Time for Large Retirement Plan Filers

Now that the retirement plan nondiscrimination testing season is wrapping up 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, due on July 31st, or October 17th, for plans that are on the extended filing due date.

The independent audit requirement applies to employers who sponsor “large” plans – those with over 100 participants on the first day of the Plan Year (January 1st for Calendar Year plans). There are special rules that allow for growing 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 applies to your plan.

For other important dates on the horizon, download our online Compliance Calendar.
 

Plan Document Restatement

We are coming to the end of the current, Third Cycle Plan Document Restatement period. Retirement plans that use an IRS-pre-approved plan document created by their recordkeeper or third-party administrator are required to complete this restatement process by July 31, 2022.

Many plans will have already completed the Plan Document Restatement Process; those that have not should reach out to their recordkeeper to ensure compliance with the plan restatement timing.
 

Market Update¹

Asset Markets continued to fall in Q2 2022 as investors came to grips with the implications of the rise of interest rates in the US and the impact of Russian invasion of Ukraine. Though the US S&P 500 Index bounced off its low of 3,666.77 on June 16th, it finished Q2 down 16.7% and down 21% for the year-to-date (“YTD”). The bond markets fared less well, experiencing a steady one-way decline with the BarCap US Aggregate Bond Index finishing down 4.65% for the quarter and down 11.15% YTD. Overseas equity markets were also down with the MSCI All Country World ex US Index down 14.7% for the quarter and down 19.5% YTD. Much of this decline is an attempt of markets trying to price in the impact of government policy and world political events on inflation and economic growth. These unsettled market conditions are likely to continue in Q3 and beyond as we head into mid-term elections in the US in the Fall.

While US economic growth declined at an annual rate of 1.5% in Q1 2022, most economist are not predicting a recession in the US until 2023. Much of the decline in the first quarter was the result of the impact in the number COVID Omicron cases and the drawdown of private inventory investment.² It is important to note that by the end of 2021, US economic growth had completely recovered from the impact of the COVID pandemic and was back to its long-term 2.0% growth line. The US economy should be able to absorb the greatest impact of Russian invasion of Ukraine, which is on oil prices. While the US in not immune to the increase of energy prices, energy as a percentage of consumer spending has diminished from 10% in the 1970s to 4.3% in February 2022. Q2 US GDP growth is estimated at an annual rate of 2.3%, with full-year 2022 GDP growth estimated at between 2.0% to 2.5%.³

Unemployment remained at 3.6% through May 2022. This is 40% below the 50-year average of 6.2% and the JOLTS index of job openings shows a 5 million gap between the number of jobs to those unemployed. It is entirely possible that US unemployment could fall to 3.4% by the end of 2022, which would be the lowest unemployment rate since 1953. An aging population, limited immigration and low population growth will constrain US GDP growth over the long-term and in the short-term, will continue the pressure on wages, adding to inflation in the US.

It is inflation and the Fed’s attempt to control it that seems to have had the most direct impact on financial markets. In June, the Fed raised the Fed Funds rate 0.75% to 1.75%, and both the increase (originally expected at 0.50%) and the reason why surprised the bond markets. Fed Chairman Powell indicated a shift in focus in determining monetary policy: “Core inflation (cost of goods and services excluding food and energy) is what we (the Fed) think about because it is a better predictor of future inflation. But headline inflation is what people experienced … expectations are very much at risk due to high headline inflation.”⁴ These comments and actions by the Fed helped perpetuate the Q2 sell-off in financial markets.

Monetary policy is a blunt tool, especially when non-financial factors such supply chain disruptions and a lack of labor are major contributors to the current high-level of inflation. Despite strong US economic fundamentals, including solid Q1 corporate earnings, markets seem to increasingly be pricing in a recession and the downward pressure on both bonds and equity markets makes it an uncomfortable time for long-term investors. However, value stocks have historically done better in a rising interest rate environment because of the prevalence of financial, energy, and industrial companies in this market sector. Within fixed income, high yield, leveraged loans, and convertibles have historically been the best performing sectors when interest rates rise. Volatility will most certainly be a feature of markets in 2022, but not a lack of healthy long-term investment opportunities.



This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

Sources:

1. Unless otherwise indicated, data and commentary is sourced from JPMorgan Asset Management: Guide to the Markets – U.S. Economic and Market Update, 2Q 2022, June 30, 2022.
2. Bureau of Economic Analysis - GDP News Release
3. Second Quarter 2022 Survey of Professional Forecasters
4. Article: "Powell says 'Inflation is much too high'..."

Disclosures:

+The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock's weight in the index proportionate to its market value.

++Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The MSCI All Country World Index ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 23 Emerging Markets (EM) countries*. With 6,062 constituents, the index covers approximately 99% of the global equity opportunity set outside the US.

National Association of Real Estate Investment Trusts

401(k) News

SECURE Act 2.0 Passes the House¹

The Securing a Strong Retirement Act of 2021 (aka SECURE Act 2.0) was passed by the House of Representatives on March 29, 2022. The measure is intended to build upon the original SECURE Act of 2019 and provide for additional improvements to the retirement savings industry. 

Below is an outline of key provisions that would apply to existing retirement plans:

• Raising the Required Minimum Distribution age from 72 to age 75 by 2032.
• Requiring all catch-up contributions to be subject to Roth tax treatment and increasing the allowance for participants ages 62 to 64 by an additional $3,500 (for a total of $10,000 in catch-up contributions)
• Allowing employers to make matching contributions to an employee’s retirement account based on the employee’s personal student loan repayments
• Permitting employer matching contributions to be made as Roth contributions
• Mandatory eligibility of part-time employees who work more than 500 hours for two years consecutively
• Creation of a national retirement savings lost and found registry to aid in locating missing participants
• Penalty-free withdrawal exception for participants who experience domestic abuse 
• Requiring newly established plans to implement an automatic enrollment feature (not applicable to existing plans)

Now that the bill has passed the House, the legislation will move to the Senate for possible action later this Spring. There are other bills that overlap these goals so please note that certain details may change as these bills move through the legislative process.

As with any major reform, we expect there will be a period of time between this legislation being enacted into law and when new changes will be implemented into retirement plans, as service providers will first need to update their systems and records to align with all new provisions. We look forward to keeping you informed of any updates and progress on the SECURE Act 2.0.
 

To Crypto or not to Crypto? 

Cryptocurrency, also known as “crypto,” is a digital currency that does not have a central issuing or regulating authority (such as a central bank like the Federal Reserve) and instead, uses a decentralized system to record transactions and issue units. Cryptocurrencies have skyrocketed in notoriety and public attention over the last few years, and this has employers asking – Is crypto an investment offering we should make available in our retirement plan? Our current answer to this is a resounding No.
 
There have been two relevant developments in the world of digital currencies:

1.  On March 10, 2022, the Department of Labor issued guidance on 401(k) Plan Investments in “Cryptocurrencies”² cautioning “…plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan….” The guidance reminds plan sponsors that they may be personally liable for cryptocurrency investments that do not meet “an exacting standard of professional care,” and that they “may not shift responsibility to plan participants to identify and avoid imprudent investment options, but rather must evaluate the designated investment alternatives made available to participants and take appropriate measures to ensure that they are prudent.”
2. On March 28, 2022, Representative Stephen Lynch, Chairman of the House of Representatives Committee on Financial Services’ Task Force on Financial Technology introduced the Electronic Currency and Secure Hardware Act³ (aka ECASH Act). The bill instructs the Secretary of the Treasury “to develop and pilot digital dollar technologies that replicate the privacy-respecting features of physical cash, in order to promote greater financial inclusion, maximize consumer protection and data privacy, and advance U.S. efforts to develop and regulate digital assets.”

While these two developments may seem at odds to with each other, they speak to the search in Washington DC for the government’s role in the regulation and/or development of digital currencies.
 
We will continue to monitor this space as we expect to hear more about crypto and its potential place (or prohibited role) in retirement plans.
 

Administration

Independent Audit Time for Large Retirement Plan Filers 

Now that the retirement plan nondiscrimination testing season is wrapping up 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, due on July 31st, or October 15th, for plans that are on the extended filing due date.

The independent audit requirement applies to employers who sponsor “large” plans – those with over 100 participants on the first day of the Plan Year (January 1st for Calendar Year plans). There are special rules that allow for growing 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 applies to your plan.

For other important dates on the horizon, download our online Compliance Calendar.
 

Plan Document Restatement

We are coming to the end of the current, Third Cycle Plan Document Restatement⁴ period. 401(k) and 403(b) plans that use an IRS-pre-approved plan document created by their recordkeeper or third-party administrator are required to complete this restatement process by July 31, 2022.

Many plans will have already completed the Plan Document Restatement Process; those that have not should reach out to their recordkeeper to ensure compliance with the plan restatement timing.
 

CalSavers

An important deadline is on the horizon for California employers (with 5 or more employees) who do not sponsor a company retirement savings plan. Employers without a retirement plan are required to either offer a workplace savings plan or sign up for the state-mandated CalSavers⁴ Retirement Savings Program by June 30, 2022. 

Employers who already offer a retirement plan to employees are exempt from CalSavers and should report the exemption online, if you have not done so already. For more information about CalSavers, visit Calsavers.com.
 

Market Update⁵

All asset markets finished Q1 2022 down, but there were signs of resiliency despite the triple whammy of a spike in Omicron COVID infections globally, the rise of interest rates in the US and the Russian invasion of Ukraine. In the US equity markets, the S&P 500 bounced off its low of -13% on March 14th to finish the quarter down 4.6%. The bond markets fared less well, experiencing a steady, one-way decline throughout the quarter with the BarCap US Aggregate Bond Index finishing down 5.9%. Overseas equity markets also saw a steady decline with the MSCI All Country World ex US Index down 4.7% for the quarter. European markets were most directly affected by the events in Ukraine, but emerging Market less so. One reason is that Russia’s weight in the MSCI Emerging Market Index had been steadily declining, from a high of 10% in 2008 to just under 4% when MSCI removed it from the index on March 2, 2022.⁶ The other reason is that Emerging Market economies tend to have a higher percentage of primary industries hence may benefit from the increase of energy and other commodity prices. 

The American economy has continued its solid performance. The US economy is now 3.4% above pre-COVID levels. Although Q4 2021 GDP growth was 5.5% YOY, the spike in Omicron COVID cases along with inventory building at the end of 2021 may result in weaker GDP growth in Q1 2022 of between 1%-2%. However, by the end of Q2 2022, the US economic growth should be right back to its 20-year trend line of 2% per year. One very interesting impact of the COVID recession has been the impact on US productivity. Since 2020, US productivity has increased by 2.7% per year, more than twice its 20-year average, much of that driven by more efficient work practices (conference calling, working from home, etc.) and use of online retailing. While many of those productivity gains may be permanent, as part of a “new normal,” the constraint on GDP growth in the future will be labor force participation. 

Unemployment in March 2022 was 3.62%. This is 40% below the 50-year average of 6.2% and there have only been five months since 1961 with a lower rate of unemployment. The JOLTS index of job openings shows a 3.5 million gap between the number of jobs to those unemployed: there are 1.89 jobs for each one American looking for work. This situation has resulted in accelerated wage growth. Wages in March grew at an annual rate of 6.7%, well above the 50-year average of 4%. The US does not have the population growth to fill the demand for labor, so unemployment is expected to continue at these historically low levels. The lack of labor force participation in the US will constrain GDP growth over the long-term; in the short-term, it will continue the pressure on wages, adding to inflation in the US.

The re-emergence of inflation, the dramatic rise in oil prices, and sanctions against Russia caused some economists to predict a return of the “stagflation” (low GDP growth and high inflation) of the 1970s.⁷ However, it is important to keep some perspective on how current economic conditions are different. First and foremost is the fact that the US is not reliant on imported oil. Energy as a percentage of consumer spending has diminished from 10% in the 1970s to 4.3% in February 2022, and oil imports have declined from 3.2% of GDP in 1979 to zero at the end of 2021. Yes, the rise in energy prices will be a drain on the finances of US consumers, but it should be transitory as higher oil prices bring currently mothballed US capacity back online and those extra dollars spent on oil will be kept circulating in the US economy. In addition, the finances of US households are much healthier. In the ‘70s, debt payment as a percentage of disposable income was 10.6%, rising to 13.2% during the Great Financial Crisis of 2008/09. Today it is a 9.2% and the net balance sheet of US households stands at $162.7 trillion, nearly twice the pre-2008/09 recession peak of $85.1T. Finally, whereas the Soviet Union of the ‘70s stylized itself as the champion of the Third World, including OPEC, against the West, today Russia has shown itself as an enemy of national self-determination and its invasion has elicited an unprecedently swift and strong reaction from the West and most developing countries.

Asset markets are now having to deal with geopolitical forces that were not present just three months ago. But strong fundamentals should continue to present opportunities for long-term US investors. US corporate margins finished 2021 at an all time high of 14.3% (earnings/sales). US corporate earnings finished at $221/share and are expected to continue to grow between 10%-20% in 2022. Value stocks have historically done better in a rising interest rate environment because of the prevalence of financial, energy, and industrial companies in this market sector. Within fixed income, high yield, leveraged loans, and convertibles have historically been the best performing sectors when interest rates rise. Volatility will most certainly be a feature of markets in 2022, but not a lack of healthy long-term investment opportunities.



This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Past performance does not guarantee future results.

Sources:

1. https://www.natlawreview.com/article/secure-20-what-employers-need-to-know
2. Department of Labor Compliance Assistance Release No 2022-01 “401(k) Plan Investments in “Cryptocurrencies”.
3. https://ecashact.us/
4. https://employer.calsavers.com/home.html
5. Unless otherwise indicated, data and commentary is sourced from three JPMorgan Asset Management sources: 1) Guide to the Markets – U.S. Economic and Market Update, 1Q 2022, December 31, 2021, 2) the “Q1 2022 Guide to the Markets Webcast” on April 4, 2022, and 3) JPM Weekly Market Recap of April 4, 2022.
6. Article: "Russia’s Diminished Role in Emerging Markets"
7. Article: "What is Stagflation..."

Disclosures:

Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency. 

Purchasing cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock's weight in the index proportionate to its market value.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The MSCI All Country World Index ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 23 Emerging Markets (EM) countries*. With 6,062 constituents, the index covers approximately 99% of the global equity opportunity set outside the US.
National Association of Real Estate Investment Trusts

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

 

Administration

2021 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 2021 census data now to ensure timely results.

Be sure to submit your annual census data and compliance questionnaires to your recordkeepers by their specific deadlines. Typically, this information is due no later than January 31st, though we have seen due dates as early as January 15th. This allows the recordkeepers sufficient time to process the year-end tests and deliver results to you before March 15th, which is the deadline for employers to process corrective refunds (for failed ADP tests, if applicable) without paying a 10% excise tax. Please contact Vita Planning Group if you have questions regarding your recordkeeper’s year-end requirements.

For other important dates on the horizon, download our online Compliance Calendar.
 

2022 Contribution Limits¹

As a reminder, the employee contribution limit for 2022 is increasing by $1,000 from last year.

Elective Deferral Limit: $20,500

Additional Catch Up Amount (age 50+): $ 6,500
 

Plan Document Restatement²

Approximately every 6 years, the IRS requires employer-sponsored retirement plans to update their plan documents through a process called “restating” the document. Most 401(k) and 403(b) plans use an IRS-pre-approved plan document created by their recordkeeper or third-party administrator and this cyclical process ensures that documents are updated to incorporate regulatory changes from any mandatory or voluntary amendments that may have been adopted since the last time the document was restated.

This process is owned by your plan’s recordkeeper, or third-party administrator so be on the lookout for this task over the coming months. Generally, the restatement involves providing you with the updated plan document for review and adoption (i.e. signature).

Many plans will have already completed the Plan Restatement Process; those that have not should expect to receive the restatement documents from their recordkeeper in the next few months. The deadline to restate plan documents is July 31, 2022. 
 

401(k) News

Retirement Plan Legislation³

There are now four bills making their way through Congress regarding retirement plans: 

1. SECURE Act 2.0 from the Ways and Means Committee (House)

2. RISE Act from the Education and Labor Committee (House)

3. Retirement Security and Savings Act (Senate)

4. Improving Access to Retirement Savings Act (Senate)

The first two House bills were passed out of their respective committees unanimously by voice vote. The last two Senate bills have not yet come out of committee.

While the details of each of these bills are different, the major areas being addressed are outlined below. 

• Required Minimum Distributions (“RMDs”):

  • Pushing out the starting age to 75 by 2032

  • Waiving the RMD requirement for those with less than $100,000 in retirement savings

  • Reducing the penalty for not taking an RMD from 50% to 25%

• Catch-up Contributions:

  • Increasing the amount by $3,500 (for a total of $10,000) for those over age 60

  • Requiring that all catch-up contributions be made as Roth

  • Possibility of employers matching in Roth dollars

• Student Loan Debt:

  • Allowing employers to make retirement plan contributions for employees whose student loan repayments prevent them from participating in a retirement savings plan

• Incentives or requirements for Automatic Enrollment are considered.

• Mandatory eligibility of Part-time Employees who work more than 500 hours for two years consecutively is also in review.

Separately from these four bills is a provision in the Build Back Better bill, currently stalled in Congress, which eliminates the ability of retirement plan participants to convert either pre-tax or after-tax contributions to Roth, commonly known as “Backdoor Roth Conversions”.⁴

We will monitor the progress of the various bills currently in Congress pertaining to retirement savings plans and report back on the final provisions of any legislation. 
 

Market Update⁵

Markets in Q4 2021 were able to shake off concerns about rising inflation and the end of easy fiscal and monetary policy to finish the year strongly higher. US equity markets finished the year on a high note with the S&P 500+ up 11.03% in Q4 resulting in a rise of 28.71% for all of 2021. Even the bond markets managed a small positive return for Q4 with the up 0.01%, though the index was down 1.54% for the year. Overseas equity markets were divided between developed markets which performed well and emerging markets which struggled. Overall, the was up 6.5% for 2021 but developed markets as measured by the MSCI EAFE Index were up 11.78% for the year, emerging markets, the MSCI EM Index, was down 2.22% in 2021. Surprisingly, the best performing market sector in 2021 was US real estate. Increased post-pandemic mobility, decreasing vacancy rates and rising asset prices delivered a 39.9% return in the FTSE NAREIT Index in 2021. 

The American economy showed remarkable resilience to the outbreak of yet another COVID-19 variant recession at the end of 2021. While US GDP growth slowed in Q3 2021, recording 2.3% annualized growth, the expectation is that growth in Q4 will have accelerated to as much as 7%, annualized. If this is the case, then the economy will have reversed all of the loss to GDP due to the COVID pandemic since Q4 2019; the US economy will be right back on its 20-year growth line of 2.0% per year. Economist forecasts for the first half of 2022 are coming in at between 2.0% and 3.0%, with a return to trend line growth after that.

A tight labor market and inflation are expected to be features of the economy in 2022. The US unemployment rate in November 2021 was 4.2% and wages rose by 5.9% year-over-year. Wage growth coupled with a high level of job openings would indicate a continued tight labor market well into 2022. Inflation was recorded at 6.9% year-over-year in the Consumer Price Index, but much of that can be attributed to transitory factors: the rise of energy prices (34% rise in oil prices in November) and supply-train disruptions due to transportation bottlenecks and offline manufacturing capacity. The core PCE deflator used by the FED excludes food and energy and is running at 4.0% at the end of 2021 with expectations that it will fall to 3.0% in 2022. 

During the 2021/2022 COVID pandemic, governmental monetary and fiscal stimulus has been two to three times larger than that of the Global Financial Crisis of 2008/2009. Those policies were largely successful in preventing a sustained recession and propping up asset prices. However, 2022 should see a diminished level of government stimulus spending (e.g., the Build Back Better bill being stalled in Congress) and an end to quantitative easing. High equity valuations and bond market expectations of the Fed raising interest rates rise as early as the second half of 2022 could make it difficult to replicate the gains recorded 2022.


 

Sources:

1) IRS 401(k) Limits

2) Third Six-Year Cycle Pre-Approved DC Plans

3) Article: Proposed Retirement System Changes

4) Article: Congress to End Backdoor Roth Conversions 

5) Unless otherwise indicated, data and commentary for the Market Update is sourced from three JPMorgan Asset Management sources: 1) Guide to the Markets – U.S. Economic and Market Update, 1Q 2022, December 31, 2021, 2) the “4Q21 Guide to the Markets Webcast” on January 3, 2022, and 3) Eye on the Market Outlook 2022, Reflation: Endgame, January 1, 2022. 
 

Disclosures:

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.
 

+The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock's weight in the index proportionate to its market value.

++ Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The MSCI All Country World Index ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 23 Emerging Markets (EM) countries*. With 6,062 constituents, the index covers approximately 99% of the global equity opportunity set outside the US.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The FTSE NAREIT All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. Equity REITs. Constituents of the Index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.


 

Administration

Form 5500 Season

For calendar year plans, the 2020 Form 5500 and Form 8955-SSA (if applicable) remains due July 31, 2021, 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 and the extended filing deadline is October 15, 2021. If you are unsure as to the status of your Plan’s Form 5500, please contact our team for assistance. 

 

It’s Independent Audit Time for Large Retirement Plans

“Large” plans – those with over 100 participants on the first day of the Plan Year – should have their mandatory audits well underway. There are special rules that allow for growing 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. For other important dates on the horizon, please check out our online Compliance Calendar.

 

401(k) News

Withdrawal Option for Birth or Adoption

The SECURE Act of 2019 permitted penalty-free withdrawals of up to $5,000 for the costs associated with the birth or adoption of a child. As with any new legislation, it takes time for recordkeepers to update their systems and processes, and we are just now starting to see this new withdrawal provision being made available to retirement plans.

 

In most cases, plan sponsors will have to request a plan amendment to allow their retirement plan to accommodate this new withdrawal option. For your convenience, we have surveyed our top recordkeepers and below is an overview of where they are at in the process of allowing for this new withdrawal option:

 

• Fidelity Investments: Request a plan amendment via email
• Empower Retirement: Request a “Birth and Adoption Plan Election” form
• Money Intelligence: Available automatically as part of standard plan document
• The Standard: Not yet available, expect to roll this out in 2022
• ADP Retirement: Not yet available, no timeframe
• Ascensus/ Vanguard: Not yet available, no timeframe
• BlueStar Retirement: Not yet available, no timeframe

Please contact us should you have any questions or if you are interested in adding this provision to your plan.

 

Market Update¹

Economic activity both in the US and overseas continued to surge in Q2 2021. The speed and forcefulness of the economic recovery has turned investor attention toward the possible rise of inflation and the end of accommodative government economic policies. While inflation concerns did seem to cause a sell-off halfway through Q2, capital markets continued to appreciate during the quarter. US equity markets were up with the S&P 500⁺ rising 8.5% in Q2 and 15.3% YTD. US bond markets also rose in Q2 taking away some of the YTD losses. The BarCap US Aggregate Bond Index⁺⁺ was up 1.42% in the quarter but remained down 1.6% YTD. Overseas equity markets were also buoyant with the MSCI All Country World ex US Index⁺⁺ up 4.4% in Q2, extending the gains made in Q1 to finish up 9.4% YTD. What markets will be focused on going forward is the shape of the economic recovery without the benefit of government support and in the face of possibly rising interest rates.

The fading of the Pandemic and the growth of demand in the US has fueled expectations for high GDP growth in 2021 and beyond. Q1 2021 US GDP grew at an annual rate of 6.4% and may have accelerated in Q2 to as much as 10% annualized. Full year 2021 US GDP growth is being estimated at around 7.5% with 2022 expectations between 4.0% and 5.0%. The economy seems to have been fueled by an 11% annualized rise in consumer spending in Q2 along with productivity growth (non-farm output per hour) of 6%. Consumers are increasingly confident as shown in the Conference Board’s Consumer Confidence Index⁺⁺⁺ rising to 127.3 in June, just below pre-pandemic 2019 levels². Labor shortages may have helped fuel the rise in productivity as businesses find ways to make do with less. Unemployment stood at 5.9% in June and the JOLTS (Job Openings and Labor Turnover Survey Survey) report, an indicator of labor scarcity, came in at its highest level since 1975³. While there might be a slight rise in unemployment as COVID-related benefits end, the FED has already reduced its forecast for unemployment at the end of 2021 to 4.5%.

The increase in economic activity in the US has given rise to expectations of higher inflation and the possible end of Government economic support. The tight labor market has had an impact on wages, with June wages up 4.6% YOY, the strongest monthly increase since1983. Supply in other areas has also not kept up with demand with bottlenecks in the supply chains of a variety of goods and shortages of some primary products. The Producer Price Index⁺⁺ rose 0.8% in the month of May, a 6.6% increase YOY.⁴ Surging commodity prices have markets increasingly wary of any indication of a change in policy away from accommodation. So far, the FED has stressed that recent inflation numbers are transitory. However, its preferred measure of inflation, the Personal Consumption Expenditures (“PCE”) stood at 3.9% in May, well above the FED’s target of 2%. The FED estimates PCE to finish the year at 3.4% and to decline to 2.1% by the end of 2021. While the FED continues to say it is committed to the current level of interest rates until 2023, the market is increasing wary that the FED will go back to fighting inflation much more quickly. This can be most clearly seen in the spread between the 30-year and 5-year Treasury Bond falling 20% in June.⁵ This wariness extends to fiscal support. It is still not clear whether President Biden’s attempt to have Congress pass a slimmed-down infrastructure spending bill along with a reconciliation bill to extend COVID-related tax credits and aid to state and local governments will be passed. This could mean the end to COVID-related economic support and fiscal spending.

GDP growth outside the US is also expected to be strong in the second half of 2021 as countries catch up to the vaccination rates of the US and the UK. The IMF is predicting global GDP to rise 6.0% in 2021 and another 4.4% in 2022, with much of the non-US growth coming from China (8.4% and 5.6%) and India (12.4% and 6.9%). In Europe, the UK is estimated to grow at 5.3% in 2021 and 5.1% in 2022, with the Euro area growing at 4.4% and 3.8%, respectively.⁶ This global rebound is also reflected in the Global Purchasing Managers Index⁺⁺. Global manufacturing and services in June stood at 58.3 globally (50 or above is considered accelerating economic growth), with the US at 63.9, the UK at 61.7 and China at 52.9. This is very good economic news compared to what the world faced just a few months ago, but markets globally may soon have to adjust to higher interest rates and less government economic support.

        

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

 

 

Sources:

¹ Unless otherwise indicated, data and commentary is sourced from two JPMorgan Asset Management sources: 1) Guide to the Markets – U.S. Economic and Market Update, 3Q 2021, June 30, 2021, and 2) the “3Q21 Guide to the Markets Webcast” on July 6, 2021. 

² https://conference-board.org/data/consumerconfidence.cfm

³ https://www.bls.gov/news.release/pdf/jolts.pdf

⁴ https://www.bls.gov/news.release/pdf/ppi.pdf

⁵ https://fred.stlouisfed.org/graph/?g=Ina#

⁶ https://www.imf.org/en/Publications/WEO/Issues/2021/03/23/world-economic-outlook-april-2021

Disclosures:

⁺The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock's weight in the index proportionate to its market value.

⁺⁺Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

⁺⁺The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

⁺⁺The MSCI All Country World Index ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 23 Emerging Markets (EM) countries*. With 6,062 constituents, the index covers approximately 99% of the global equity opportunity set outside the US.

⁺⁺The Producer Price Index (PPI) is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller.

⁺⁺Purchasing managers' indexes (PMI) are economic indicators derived from monthly surveys of private sector companies. The three principal producers of PMIs are the Institute for Supply Management (ISM), which originated the manufacturing and non-manufacturing metrics produced for the United States, the Singapore Institute of Purchasing and Materials Management (SIPMM), which produces the Singapore PMI, and the Markit Group, which produces metrics based on ISM's work for over 30 countries worldwide.

⁺⁺⁺The U.S. consumer confidence index (CCI) is an economic indicator published by The Conference Board to measure consumer confidence, which is defined by The Conference Board as the degree of optimism on the state of the U.S. economy that consumers are expressing through their activities of savings and spending. Global consumer confidence is not measured.

Administration

2020 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 2020 census data now to ensure timely results.

Be sure to submit your annual census data and compliance questionnaires to your recordkeepers by their specific deadlines. Typically, this information is due no later than January 31^st, though we have seen due dates as early as January 15^th. This allows the recordkeepers sufficient time to process the year-end tests and deliver results to you before March 15^th, which is the deadline for employers to process corrective refunds (for failed ADP tests, if applicable) without paying a 10% excise tax. Please contact Vita Planning Group if you have questions regarding your recordkeeper’s year-end requirements.

For other important dates on the horizon, download our online Compliance Calendar.

2021 Contribution Limits¹
As a reminder, the employee contribution limits for 2021 are remaining the same as last year, with the standard limit set at $19,500 and the age 50+ catch up amount set at $6,500. For your convenience, we have illustrated below the maximum per pay period deferral amounts based on two common payroll cycles.

• $19,500 max:
  26 pay periods - $750.00
  24 pay periods - $812.50
  
  
• $26,000 max (age 50+):
  26 pay periods - $1,000.00
  24 pay periods - $1,083.33
  
  

Plan Document Restatements
Approximately every 6 years, the IRS requires employer-sponsored retirement plans to update their plan documents through a process called “restating” the document. Most 401(k) and 403(b) plans use an IRS-pre-approved plan document created by their recordkeeper or third-party administrator and this cyclical process ensures that documents are updated to incorporate regulatory changes from any mandatory or voluntary amendments that may have been adopted since the last time the document was restated.

This process is owned by your plan’s recordkeeper or third-party administrator so be on the lookout for this task over the coming months. Generally, the restatement involves providing you with the updated plan document for review and adoption (i.e. signature). The deadline² to restate plan documents is July 31, 2022, however we expect recordkeepers and third-party administrators to begin rolling out the process this year.

 

401(k) News

CARES Act COVID-19 Provisions End
The COVID-19-related loan and distribution provisions of the CARES Act ceased at the end of December 2020.³ Any loan repayments that were suspended under the CARES Act will need to resume with the first payroll in January 2021. Please ensure that you receive an updated amortization schedule from your retirement plan recordkeeper and update your payroll records accordingly.

While the CARES Act withdrawal provisions ended, FEMA has declared the COVID-19 pandemic a disaster in all 50 states, hence the hardship withdrawal provisions passed as part of the SECURE Act remain in force. It is important to note that disaster-related hardship distributions, in the context of the SECURE Act, do not provide the same tax relief that COVID-19-related distributions offered under the CARES Act and would be subject to normal hardship distribution rules.

 

Consolidated Appropriations Act, 2021
The Consolidated Appropriations Act, 2021 was signed into law on December 27, 2020. The comprehensive bill provides funding for the federal government and provides additional COVID-19 relief to individuals and businesses. Although the CARES Act was not extended as part of the passage of this legislation, the Act included retirement plan provisions that provide some relief to plan sponsors and participants.

For example, the Act enables certain retirement plan sponsors that laid off or furloughed employees due to the COVID-19 pandemic to potentially avoid a partial plan termination.

The bill⁴ states: “A plan shall not be treated as having a partial termination (within the meaning of 411(d)(3) of the Internal Revenue Code of 1986) during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020.” Essentially this allows relief to companies who rehire previously laid off workers by avoiding a partial plan termination.

The Act also allows for “qualified disaster distributions” from retirement plans for participants affected by disasters declared by the President under the Stafford Act, other than the COVID-19 pandemic. Participants in 401(k), 403(b), money purchase pension and government 457(b) plans may take up to $100,000 in aggregate from their retirement plan accounts without tax penalties. Income tax on those distributions may be spread over three years, and participants may repay them into a plan that is designed to accept rollovers within three years. The bill states that participants have until 180 days after enactment of the bill to take qualified disaster distributions.

 

Market Update⁵

Markets in the fourth quarter of 2020 were buffeted in by countervailing forces: between the upswing in COVID-19 cases around the globe and the delivery of a vaccine; between the result of the US Presidential election and the attempts to contest its validity; between the timing of continued governmental economic support and its scale. Despite several sharp declines during Q4 2020, asset markets finished up for the quarter and for the year overall. The S&P 500 rose nearly 12% in Q4, taking the index up over 18% for the year. The pace of US bond market appreciation slowed with the BarCap US Aggregate Bond Index up 0.64% in Q4, resulting in a rise of 7.5% for the year. Overseas, the MSCI All Country World ex US index surged 14% in Q4, leaving the index up 6.5% for the year. The rollout of COVID-19 vaccine programs as well as the expectation of continued fiscal and monetary support should be positive for asset markets in early 2021.

At the end of 2020, US GDP and employment were struggling to regain their levels seen at the beginning of the year with progress being impeded by the spike upward in the number of COVID cases in the US and the resulting social distancing measures re-introduced to control their spread. 2020 Q3 US GDP was revised upward to 33.4% annualized rate, up from the record 31.4% plunge in Q2. Despite this strong bounce back, GDP is still about 3.5% below its 2019 Q4 level. Strong consumer spending in October and an increase in industrial production in November have resulted in estimates for GDP growth in Q4 2020 as high as 5%. At the end of November 2020, unemployment was at 6.7%, and 56% of jobs lost at the outbreak of the pandemic have been regained. The slower-than-expected nonfarm payroll increase of 245,000 in November may signal that job gains will moderate at the end of 2020 and into 2021.

The rollout of COVID-19 vaccines continued governmental economic support and stimulus, and the release of pent-up consumer and corporate demand is leading to expectations of continued support for asset markets, both in the US and overseas in 2021. US equities in 2021 should benefit from increasing corporate earnings, due both to higher margins and improving GDP growth. However, the easy monetary policy and massive fiscal spending that helped bond markets appreciate in 2020 have pushed the 10 Yr US Treasury yield below 1% and compressed credit spreads making the outlook for bonds, in terms of either income or capital appreciation, more difficult to project. Even with the run up in overseas equity prices in Q4 2020, both overseas emerging and developed markets appear cheap relative to US equities, trading well below historical price-to-book and price-to-earnings ratios. The same health, economic support and demand factors that are supportive of US equities, appear as compelling overseas as we begin 2021.

        

This commentary is provided for informational purposes only and does not pertain to any security product or service and is not an offer or solicitation of an offer to buy or sell any product or service. Nothing in this commentary constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to your individual circumstances.
Securities are offered only by individuals registered through AE Financial Services, LLC (AEFS), member FINRA/SIPC. Investment advisory services offered through Liberty Wealth Management LLC, a Registered Investment Adviser with the SEC. Insurance offered through Vita Insurance Associates, Inc. CA Insurance License 0581175. DBA Vita Companies. AEFS is not an affiliated company with Liberty Wealth Management, or Vita Companies.

 

 

Sources:

¹ IRS 401(k) Limits

² Cycle 3 DC Plan Restatements FAQ

³ CARES Act Q&A

⁴ Consolidated Appropriations Act, 2021

⁵ JPMorgan Asset Management, Guide to the Markets – U.S. Economic and Market Update, 1Q 2021 December 31, 2020.

Year-End Participant Notifications

As we wrap up 2020, 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:

Qualified Default Investment Alternative Notice

• Applicable Plans: Plans with an assigned QDIA
• Distribution Date: December 1, 2020

2021 Safe Harbor Notice

• Applicable Plans: Plans with a Safe Harbor provision
• Distribution Due Date: December 1, 2020

Automatic Enrollment Notice

• Applicable Plans: Plans with an automatic contribution arrangement (automatic enrollment) feature
• Distribution Due Date: December 1, 2020

2019 Summary Annual Report

• Applicable Plans: ALL retirement plans (note: this is the extended due date for plans that filed a Form 5558)
• Distribution Due Date: December 15, 2020

Download our Compliance Calendar to see what other important dates may be approaching.

 

 

Market Update¹

Markets in the third quarter of 2020 maintained and extended the sharp rebound experienced in the second quarter. The S&P 500 rose another 10% in Q3, taking the index up 8.9% year-to-date (“YTD”). US bond markets held onto the gains from the beginning of the year with the BarCap US Aggregate Bond Index up another 0.6% in Q3, resulting in a YTD rise of 6.79%. Overseas, the MSCI All Country World ex US index clawed back another 6.25% in Q3, leaving the index down 5.44% YTD. Progress from here will be much harder to come by. Q2 market movements will need to be validated by positive economic figures to continue these gains in Q4 2020.

 

The rally in equity markets seems to have been driven largely by a slowdown in COVID cases and the continued monetary and fiscal support provided both in the US and abroad. The number of cases and the rate of fatality are diminishing, though we will most probably continue to bounce back and forth between social easing and restriction for some time. The passage of an extension of the CARES Act seems to have been delayed by the elections in the US. However, most commentators still expect passage of an extension of economic support in the lame duck session of Congress, no matter which party wins. The bond market rally is supported largely by the expectation that the Fed will keep rates low through 2021. Fed Chairman Powell has given no indication otherwise.

 

At some point, economic fundamentals will need to catch up with market valuations if we are to maintain YTD market gains. The US GDP registered a 31.4% decline in Q2 and estimates are for a rebound of as much as 35% in Q3 and another small (2-5%) rise in Q4. Early expectations for full-year 2020 GDP growth are coming in at around a decline of 10%, which would make this the second most severe recession since the Great Depression. Most economists are predicting positive and sustained year-on-year economic growth in the US from Q1 or Q2 of 2021. About half of jobs lost in Q1 and Q2 of 2020 have come back, and unemployment rate has come off its peak of 14.7% in April to 7.9% at the end of September. While these trends support the hope for a short-lived recession, we are unlikely to see a sustained rebound in GDP or jobs growth until a vaccine and a cure for COVID-19 is found and deployed.

These difficult economic conditions have naturally had an adverse impact on corporate earnings. Corporate earnings in 2020 are expected to be down as much as 43% from last year, though these will be spread unevenly among sectors. Certain sectors –technology, communications, and consumer staples – may see positive earnings growth this year, but earnings for the economy as a whole are not forecast to rebound until 2021 at the earliest. S&P 500 forward Price/Earnings ratio rose to 21.4x at the end of September, more than one standard deviation above its 25-year average of 16.46x. While this is on a par with valuations seen during the “Tech Wreck” of the early 2000’s, lower interest rates today should make these levels somewhat more sustainable.    

 

The market rebound in Q2 and Q3 2020 has been heartening. However, the possibility of an uptick in COVID-19 cases, politicking around the extension of economic support, and the rhetoric of a presidential election campaign means we are likely to see continued market volatility for the rest of 2020.

        

 

This commentary is provided for informational purposes only and does not pertain to any security product or service and is not an offer or solicitation of an offer to buy or sell any product or service. Nothing in this commentary constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to your individual circumstances.

 

¹Source data: JPMorgan Asset Management, Guide to the Markets – U.S. Economic and Market Update, 4Q 2020 September 30, 2020.

The Internal Revenue Service has announced the 2021 cost-of-living adjustments (COLAs) to the various dollar limits for retirement plans.¹  The Social Security Administration (SSA) has also announced the taxable wage base for 2021.

	2021	2020
Elective Deferral Limit (401(k) & 403(b) Plans)	$19,500	$19,500
Catch Up Contributions (Age 50 and over)	$6,500	$6,500
Annual Defined Contribution Limit	$58,000	$57,000
Annual Compensation Limit	$290,000	$285,000
Highly Compensated Employee Threshold	$130,000	$130,000
Key Employee Compensation	$185,000	$185,000
Social Security Wage Base	$142,800	$137,700

Definitions

Elective Deferral Limit means the maximum contribution that an employee can make to all 401(k) and 403(b) plans during the calendar year (IRC section 402(g)(1)).

Catch-up Contributions refers to the additional contribution amount that individuals age 50 or over can make above the Elective Deferral and Annual Contribution limits. Catch-up contributions were initiated under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and made permanent by the Pension Protection Act.

Annual Contribution Limit means the maximum annual contribution amount that can be made to a participant's account (IRC section 415). This limit is expressed as the lesser of the dollar limit or 100% of the participant's compensation, and is applied to the combination of employee contributions, employer contributions and forfeitures allocated to a participant's account.

Annual Compensation Limit means the maximum compensation amount that can be considered in calculating contribution allocations and non-discrimination tests. A plan cannot consider compensation in excess of this amount (IRC Section 401(a)(17)).

Highly Compensated Employee Threshold means the minimum compensation level established to determine highly compensated employees for purposes of non-discrimination testing (IRC Section 414(q)(1)(B)).

Social Security Wage Base is the maximum amount of earnings subject to Social Security payroll taxes.

¹Source: https://www.irs.gov/pub/irs-drop/n-20-79.pdf

2021 Health Savings Account (HSA) Limits
2021 Pre-Tax Contribution Limits

Securities are offered only by individuals registered through AE Financial Services, LLC (AEFS), member FINRA/SIPC. Investment advisory services offered through Liberty Wealth Management LLC, a Registered Investment Adviser with the SEC. Insurance offered through Vita Insurance Associates, Inc. CA Insurance License 0581175. DBA Vita Companies. AEFS is not an affiliated company with Liberty Wealth Management, or Vita Companies.

Administration

Form 5500 Season

For calendar year plans, the 2019 Form 5500 and Form 8955-SSA (if applicable) remains due July 31, 2020 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 and the extended filing deadline is October 15, 2020. If you are unsure as to the status of your Plan’s Form 5500, please contact our team for assistance.

It’s Independent Audit Time for Large Retirement Plans

“Large” plans – those with over 100 participants on the first day of the Plan Year – should have their mandatory audits well underway. There are special rules that allow for growing 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. For other important dates on the horizon, please check out our online Compliance Calendar.

 

401(k) News

Relief from Physical Presence Requirement on Certain Electronic Signatures

Regarding certain document elections and consents, if a signature must be witnessed by a plan representative or notary public, it must be witnessed “in the physical presence” of that person according to current regulations. The IRS has recently addressed this issue considering today’s landscape and has established temporary alternative procedures that may be used to satisfy the physical presence requirement in 2020.

For example, if a signature is facilitated by a notary public, the physical presence requirement is deemed satisfied if the electronic system for remote notarization uses live video and is consistent with state-law requirements for a notary public. Other conditions must be satisfied if a signature is being witnessed by a plan representative, such as showing photo ID during live video conference, allowing for direct interaction, scanning or faxing a signed copy of the document, and having the plan representative provide acknowledgment of witnessing the signature.

While the new procedures are intended to help expedite access to CARES Act related distributions, it is important to note that the physical presence requirement is not typically required, except in cases where the retirement plan has an annuity component. This relief also applies to any signature that would otherwise have to be witnessed in the physical presence of a plan representative or notary, such as spousal consents. More details can be found in the IRS Notice 2020-42.

DOL Proposed Rule on ESG Investments

Increased awareness of socially responsible investing, also referred to as ESG (environmental, social, governance) investing, prompted the DOL to propose a new rule on June 30^th regarding Financial Factors in Selecting Plan Investments. The proposed rule confirms that “ERISA requires plan fiduciaries to select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.” Secretary of Labor, Eugene Scalia, said in a news release, “Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan…rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

Vita feels that it is possible to meet participants’ desire for socially responsible investing without diminishing a plan’s adherence to its ERISA-mandated fiduciary responsibility. Our approach is explained in our Fund Selection Methodology – ESG Funds. We will continue to monitor DOL guidance and keep you abreast of any new developments in this area.

 

Market Update

Markets in the second quarter of 2020 reacted positively to the health, fiscal, and monetary responses to the COVID-19 pandemic by governments around the world. The US equity market had its best quarter since 1998. The S&P 500 rose almost 20% in Q2, taking back most of the loss of the first quarter and leaving the index down 5% year-to-date (“YTD”). US bond markets continued the gains made in Q1. The BarCap US Aggregate Bond Index was up 2.9% in Q2 resulting in a YTD rise of over 6% for the index. Overseas, the MSCI All Country World ex US index finished the quarter up over 22%, which left the index down 12% YTD. Progress from here will be much harder to come by. Q2 market movements will need to be validated by positive economic figures in order to maintain and extend these gains through 2020.

While US economic data began to improve at the end of Q2 2020, we are unlikely to see a strong and sustained rebound until a vaccine and/or cure for COVID-19 can be found. Q1 US GDP fell 5% on an annualized basis. Estimates for Q2 GDP are for a fall of between 35% to 40% with the possibility of single digit positive GDP growth in the second half of the year. Initial estimates for full year 2020 GDP in the US are between minus 12% to 13%. After losing 22.5 million jobs in March and April, the US economy added back 12 million jobs in May and June as some restrictions were eased. This resulted in the unemployment rate rising to 14.7% in April before falling to 11.1% in June. It is possible that unemployed data is skewed lower by furloughed workers not having yet applied for benefits and those who have left the workforce not trying to get back in at the moment. If that is the case, it is unlikely to see single a digit unemployment rate until 2021. Inflation dipped in May but is expected to remain flat for the rest of the year even with the huge expansion of the government’s balance sheet.  

Markets were buoyed by the speed and the size of the actions by the US Government. Congress enacted $2.4 billion of support packages to workers and businesses. Negotiations are on-going over the extension of these measures, most notably unemployment benefits to the lowest paid workers and aid to local governments. The Fed bought a record $2.5 trillion of government, agency and corporate bonds since March 23^rd in order to maintain the liquidity of the financial system. The Fed is committed to a Fed Funds range of between zero and 0.25%; neither Fed Chairman Jerome Powell nor any of the 17 Federal Reserve Board members have spoken about moving to a negative Fed Funds rate. Markets are looking to the Fed to maintain this level of interest rates through 2020 and to the Congress for continued fiscal support over the summer and perhaps after the election.

At some point, however, economic fundamentals will need to catch up with market valuations if we are to maintain the Q2 market gains. The S&P 500 forward Price/Earnings ratio rose to 21.72% at the end of June, well above its 25-year average of 16.39%. Corporate earnings in 2020 are expected to be down as much as 43% from last year. Certain sectors – utilities, technology and consumer staples – may see positive earnings growth this year, but the market as a whole is not forecast to rebound until 2021. The yield curve is expected to steepen somewhat over the course of the year, but low economic growth and continued quantitative easing by the Fed should mean that bond markets will not have to deal with the inflationary implications of the huge increase in US government balance sheet until after 2021. While the market rebound in Q2 2020 is heartening, the possibility of an uptick in COVID-19 cases, slower-than-expected GDP growth and the rhetoric of a presidential election campaign means we should expect to see continued market volatility for the rest of 2020.    

401(k) News

Passage of the CARES Act

Congress passed the CARES Act on March 27, 2020 to help participants and plan sponsors through the economic consequences of the COVID-19 viral pandemic.

Relief to participants: The CARES Act has three main provisions for those impacted by COVID-19, as related to retirement plans:

• Penalty-free Withdrawals of up to $100,000
• Loan limit raised to $100,000 with payments delayed for one year
• No Required Minimum Distributions (“RMDs”) in 2020

For more details about the CARES Act and other recent legislation that may impact employers, please refer to Vita’s COVID-19 Employer Playbook, a comprehensive overview of key issues facing employers at this time.

We should note that there are other potential changes in the pipeline. The following relief is being sought but no decisions have yet been made:

• Extension of all plan-related deadlines, including the filing due date of the Form 5500
• Relief from mandatory employer contributions (such as Safe Harbor contributions)
• Clarification of how furloughs, paid/unpaid leave, or reductions in hours are treated in relation to eligibility, vesting, “break-in-service” rules, partial plan termination, etc.

Amending Safe Harbor Plans Mid-Year

Did you know it is possible to amend your Safe Harbor plan mid-year to reduce or suspend Safe Harbor contributions? There are several rules and considerations when it comes to amending a Safe Harbor Plan but please know that is possible to reduce or suspend Safe Harbor contributions mid-year. Below are the guidelines for such a change.

The company must be operating at an economic loss OR the company must have included a potential reduction/suspension statement in the annual safe harbor notice AND must satisfy the following procedural requirements:

(1) Must adopt a plan amendment before the end of the applicable plan year to reduce or suspend Safe Harbor contributions. This amendment should not be effective earlier than:

• Date it is adopted (i.e. needs to be adopted before it is effective), and
• 30 days after participants have received the “supplemental notice.”

(2) Must give participants a “supplemental notice.” The “supplemental notice” is a notice explaining the consequences of the amendment that reduces or suspends the plan’s matching or nonelective contributions, the procedures for changing their salary deferral elections (and their employee contribution elections, if applicable) and the effective date of the amendment.

(3) Must give participants a reasonable opportunity after they receive the supplemental notice, and before the change is effective, to change their salary deferral elections (and their employee contribution elections, if applicable).

(4) Must make all safe harbor contributions through the effective date of the amendment. This means you would still be obligated to fund the Safe Harbor match each pay period till the effective date of suspension.

(5) The plan will not have deemed Safe Harbor for testing. The plan must pass the actual deferral percentage (ADP) test and the actual contribution percentage (ACP) test (if ACP is applicable) for the entire plan year in which the Safe Harbor contributions are reduced or suspended, using the current year testing method. This means the amendment to remove Safe Harbor would need to be prospectively effective but the impact of removing subjects the plan to the testing for the full plan year.

(6) The plan must satisfy the top-heavy test.

 

Administration

Large Retirement Plans: Start Scheduling Your Independent Audit

The independent audit requirement applies to employers who sponsor “large” plans – those with over 100 participants on the first day of the Plan Year (January 1^st for Calendar Year plans). There are special rules that allow for growing 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.

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

Form 5500 Season Coming Up  

While the IRS has extended the deadlines for many tax filings (e.g., personal taxes), please note that the Form 5500 filing deadline remains unchanged. Calendar-year retirement Plans’ Form 5500 filings are due on July 31^st, or October 15^th, if your plan has been put on extension.

We will continue to watch for any updates within this area and will keep you updated should the Form 5500 filing deadline be extended further in light of current events.

 

Market Update

The international effort to stem the spread of the COVID-19 “coronavirus” caused wild swings in all asset markets in the first quarter of 2020. Equity markets fell as traders attempted to price-in the impact of social distancing measures on global GDP; the US Government bond market rose as the US Federal Reserve Bank (the “Fed”) cut interest rates and re-instituted quantitative easing in order to ensure the liquidity of the US financial system. The S&P 500 Index reached its all-time high of 3,386 on February 19th only to fall 30% by March 24th, finally finishing the quarter down 24%. Similarly, the MSCI All Country World ex US index finished the quarter down 30%. By contrast, the BarCap US Aggregate Bond Index finished the quarter up 3.1% after hitting a high of up 6% on March 9th. The full economic impact of COVID-19 will likely be felt in Q2 2020. However, governments around the world appear committed to deploying any and all policy tools to mitigate the damage to individuals and companies. 

2020 will likely be the year of a “U” shaped recession in the US: a very sharp fall in Q2 followed by one or two quarters of flat to slightly negative growth and a rebound in Q1 2021. US GDP growth for Q1 2020 is expected to be flat at best, or slightly negative. This reflects increased spending due to hoarding seen at the beginning of the quarter and lockdowns at the end. Estimates for Q2 economic are for a drop of between -15% to -20%. We’ve already seen US jobless claims hit consecutive record levels in the last two weeks of March: 3.3M on March 21st and 6.6M on March 28th. Forecasts are for the US unemployment rate to rise from its Q1 low of 3.5% to the mid-teens by Q3 2020. The earliest economists are predicting positive GDP growth in the US is the fourth quarter of 2020, but it is more likely that we will not see a strong rebound in US GDP growth until Q1 2021, once a vaccine and cure for COVID-19 is found and deployed.

If there is good news in all of this it is that global economic fundamentals prior to the outbreak of COVID-19 were sound and government’s response has been swift and forceful. On February 28th, Fed Chairman Jerome Powell committed the Fed to using “our tools and act as appropriate to support the economy”. Since then, the Fed has cut the Fed Funds rate to zero, pledged to expand its purchases of securities in volume and type, and established new credit facilities in various parts of the financial markets. On March 27th, Congress passed a $2.3 trillion rescue package, three times the $750 stimulus package passed in response to the financial crisis of 2008/2009. The “CARES Act” provides cash payments to lower income households, expanded unemployment benefits to laid off and self-employed workers, grants to small businesses to maintain employment, loans to companies, cities and states, and health-care spending and tax breaks. All of this is meant to help protect workers and businesses; so that unemployment does not impoverish workers and that diminished revenue does not bankrupt companies until such time as the health emergency is over and we can all come out of our homes and start spending again. 

At times like these, it is important for long-term retirement plan investors to remember the fundamentals. The economy and the stock market will recover: since 1950, it has taken an average of 401 days for the S&P 500 to recover its high after a decline of 20% or more. Stocks remain the most consistent long-term wealth generator available to the average investor: since 1926, the annual compound rate of return for large cap US equities is 10.2%, compared with 5.5% for US Government Bonds. Diversification works: over the past quarter, a balanced portfolio of 60% equities and 40% bonds would have lost 15% as compared to the 24% loss of an equity-only (S&P 500) portfolio. In addition, the market fluctuations in Q1 would already have made the balanced portfolio more conservative, to 54% equities and 46% bonds. Those same market fluctuations have improved valuations for US stocks, bringing them below the 25-year average, and lowered the yield on the 10-year Treasury to 0.6%. If a diversified portfolio made sense before the recent market movements, then this is a good opportunity to rebalance back to 60-40. Staying the course on one’s long-term retirement investment plans may not feel comfortable during the market swings that will happen over the next weeks and months. But like other good advice regarding COVID 19, it is important not to touch two things: your face and your 401(k).

Recent Market Volatility

While market corrections are never pleasant, they are something investors should expect to happen from time to time, especially as saving for retirement is a long-term process. We believe that one of the best ways to manage risk, and our reaction to it, is to have a well-diversified portfolio. 

As Co-Fiduciary on our clients’ 401(k) plans, Vita Planning Group works closely with plan sponsors and recordkeepers to ensure the mutual funds available to participants are well managed and offer a diverse range of market sectors and investment strategies. While this cannot prevent short-term losses in any portfolio (or guarantee a profit), we encourage participants to look at retirement savings as a long-term process and to base investment decisions on risk tolerance and time horizon, over that long-term. 

Perspective

It is important to remember that we have seen many sharp market corrections from which we have recovered: most recently the crash of technology stocks in the early 2000’s, the mortgage crisis of 2008/2009, and now the Coronavirus (Covid-19) outbreak. 2020 is also an election year, which is likely to add to the already volatile markets.   

There have been at least 10 serious health events like Covid-19 (e.g. SARS, Avian flu, Zika virus) since the 1990s that have caused significant downturns in global markets.¹ In 8 of those 10 events, stocks climbed more than 10% after the scare. Additionally, there have been 26 market corrections of at least a 13% decline since the end of World War II. On average it has taken four months for markets to get back to their pre-decline levels.

Closing Thoughts

Periodically rebalancing investments is an important way to help manage risk in one’s portfolio and can help one to meet his or her retirement goals. However, this should be done in a calm and methodical way and not in reaction to short-term market movements or media hysteria. 

¹Wall St. Journal Op-Ed published on March 2, 2020