Blogs Retirement

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

Administration

2019 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 2019 census data now to ensure timely results and processing of any potential refunds.

Be sure to submit your annual census data and compliance questionnaires to your recordkeeper by their specific deadline (typically no later than January 31^st, though some recordkeepers have stricter deadlines) to ensure delivery of testing results before March 15^th. Any ADP refunds made after March 15^th will be subject to a 10% employer excise tax. Please contact the Vita Planning Group if you have questions regarding your record-keeper’s requirements.

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

Contribution Limits Reminder for 2020
As a reminder, the 401(k) contribution limits for 2020 have increased to $19,500 (up from $19,000 in 2019). The age 50+ catch up amount has also increased to $6,500, thereby allowing employees to contribute up to a total of $26,000. For your convenience, we have illustrated below the maximum per pay period deferral amounts based on two common payroll cycles.

401(k) News

Passage of the SECURE Act
The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act of 2019 has been passed and signed by the President.  The law is effective January 1, 2020. Below are some of the highlights that affect established 401(k) plans. Key provisions to be aware of are:  

• Penalty-free withdrawals up to $5,000 are now allowed for expenses related to the birth or adoption of a child.
• Penalty-free withdrawals are now allowed for those affected by a Federally (“FEMA”) declared disasters. In addition:
  • The maximum withdrawal amount raised to $100,000,
  • Disaster-related distributions may be rolled back into a qualified plan or IRA, and
  • The participant loan limit for those affected by disaster is increased to $100,000.

• Plans can now be amended mid-year to become a Safe Harbor plan, provided the employer commits to a minimum 3% non-elective contribution.
• Annual notices are no longer required for non-elective contribution Safe Harbor plans.

Part-time Employees: the act extends coverage to long-term part-time employees. Any part-time employee who has worked 3 consecutive years of at least 500 hours per year is permitted to participate.

• The age at which required minimum distributions (“RMD”) must be made is now 72. This is effective with respect to individuals who attain age 70½ after December 31, 2019.
• There is no longer a maximum age limit on contributions to Individual Retirement Accounts (“IRA”).

Automatic Enrollment: the cap on contributions is increased to 15%.

Stretch IRAs Restricted: Currently, after the death of a plan participant or IRA owner, a non-spouse beneficiary is permitted to stretch the required minimum distributions over the beneficiary’s life based on his or her life expectancy. Under the new law, all amounts held by the plan or IRA must be distributed within 10 years of the plan participant’s or IRA owner’s death. An exception to the 10-year distribution rule may be provided for an “eligible beneficiary.”

For more details on these provisions, please visit our SECURE Act blog post.

Market Update

All major asset markets rose in 2019 through a combination of solid, if unspectacular, US economic growth, a reversal of Fed policy from tightening to easing and the apparent trade truce between the US and China. Among equity markets, the US S&P 500 Index ended the year up 28.9%, while overseas the MSCI EAFE (Developed Markets) Index rose 18.43% and the MSCI Emerging Markets Index rose 16.27%. It was a similar picture in fixed income: the BarCap US Aggregate Bond Index rising 8.7%, while overseas the BarCap Global Aggregate ex-US Bond Index rose 4.6%. Economic fundamentals both in the US and overseas look little changed at the beginning of 2020, but the significant rise in both equity and fixed income markets seen in 2019 will likely be much more difficult to replicate in the year ahead. 

 US GDP growth in Q4 2019 is expected to come in at around 2.0% YOY, down from the peak of 3.2% YOY growth in Q2 2018. Annual US GDP growth at 2.0% may seem unspectacular compared with the average annual GDP growth rate of 2.7% since 1969 as well as the average 2.3% growth rate since the beginning of the current expansion in 2009. However, it is significant to note that the 2010’s is the only decade in US economic history not to have experienced a recession. With unemployment at 3.5% in December, inflation stable at between 1.5% to 2.0%, and none of the major cyclical sectors of the economy (auto sales, housing starts, business spending, inventories) over-extended, most analysts, including the Fed in its December 2019 projections, expect the US economy to be able to maintain this 2.0% rate of GDP growth in 2020. 

Overseas economies did not fare as well as the US in 2019, being much more directly affected by trade tensions and political uncertainty, most notably Brexit, which put a damper on European as well as Emerging Market economic growth. EU economic growth fell from 0.4% in Q1 to 0.2% in Q3 and looks to come in at or just below 1% for all of 2019, which is about 0.5% worse than 2018. Similarly, Chinese economic growth has been falling from 6.5% in 2018 to 6.0% YOY in Q3 2019. There was encouraging news in December on the trade front:  an agreement to ratify a replacement of NAFTA, a decisive result in the UK election opening the way for a smooth Brexit, and a phase one agreement on tariffs between the US and China. In addition, overseas central banks and governments have sought to stem the deterioration in growth by re-instituting easier monetary and fiscal policies in the second half of the year, leading to optimism that perhaps the worst is over in terms of the deterioration of overseas growth.       

The danger to the US economy is that the American consumer stops spending and business stops hiring. Consumer spending has more than offset the reduction in business non-residential investment spending and kept economic growth positive. Low unemployment, rising wage growth and the residual effects of recent tax cuts may be contributing to consumer confidence. However, research has shown that that business freezing hiring is a much stronger leading indicator of a possible recession than layoffs. What will be important to watch are the non-farm payroll numbers, currently running at between 120,000 to 150,000 per month. A significant decrease in non-farm payrolls may well be the trigger that eventually causes the US consumer to stop spending and the American economy to decline from current levels and even turn negative.       

Until that time, though, asset markets seem likely to see continued volatility and will struggle to match the impressive gains of 2019. The steep sell-off in US equities at the end of 2018 meant that there was quite easy ground to be made up in 2019. US equities are now fully valued and trading at 18.18x forward earnings, well above the 25-year average of 16.28x. The abrupt U-turn by the Fed from raising rates in 2018 to lowering rates three times in 2019 fueled the rally in US bond markets.  Most analysts now expect Fed policy to be on hold for 2020 as long as economic growth holds at these levels and inflation remains subdued. The focus for US asset markets in 2020 will likely be on quality of earnings for equities and quality of credit for fixed income. There well could be opportunities in overseas equity and fixed income markets if recent trends continue positively. In any case, the importance of a well-balanced portfolio that include some downside protection has never been more important than at the beginning of this new decade.

Overview
The Internal Revenue Service has announced the 2020 cost-of-living adjustments (COLAs) to the various dollar limits for retirement plans.  The Social Security Administration (SSA) has also announced the taxable wage base for 2020.

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.

2020 Health Savings Account (HSA) Limits
2020 Pre-Tax Contribution Limits

The Employee Benefits Security Administration of the Department of Labor (DOL) recently announced a proposal for new “safe harbor” guidelines governing electronic distribution of important ERISA disclosures. 

Under current DOL and IRS regulations, employees must affirmatively agree to receive ERISA and other welfare and retirement plan disclosures electronically.  Plan sponsors incur varying degrees of financial and administrative burden in obtaining such agreements, or in using non-electronic methods to deliver these important disclosures. 

The proposed safe harbor rules would allow participants to opt-out of electronic distribution and continue receiving paper notifications, rather than having to opt-in.  Importantly, plan sponsors will be required to notify plan participants of their right to opt-out before defaulting to an electronic distribution protocol.  

The new safe harbor rules intend to simplify employee benefit plan disclosures and alleviate some of the financial and administrative burden.  DOL estimates that expanded use of web and cloud-based technology will save employers over $2 billion in the next ten years.   

DOL has invited interested parties to provide feedback and additional information regarding this proposal. Vita will provide updates as the proposal moves through the review process. 

Administration

7 Days Left to File Your Form 5500!
For calendar-year plans currently on extension, Tuesday, October 15, 2019 is the deadline to file the Form 5500 and Form 8955-SSA.  Please note, the DOL website is subject to high traffic on October 15^th, so be sure to file as soon as you are able and avoid the last minute rush!  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.

Year-End Participant Notifications 
As we wrap up 2019, 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.

View our Compliance Calendar to see what other important dates are approaching.

Market Update

Asset markets were largely range-bound in the third quarter of 2019.  Any positive economic news was quickly overshadowed by continuing uncertainty over trade and economic policy.  The S&P 500 Index ended the quarter up 1.18%, by far the slowest quarter year-to-date (“YTD”), while overseas, the MSCI EAFE Index lost 0.67% after having shown positive returns in the first two quarters.  The best performing sector was US fixed income, where the US Aggregate bond Index rose 2.22% due to the expectation of continued easing by the Fed. 

Revised US GDP growth figures for 2018 showed that US economic growth may have peaked in Q2 2018 at 3.1% YOY, falling to 2.0% YOY in Q2 2019.  US GDP growth is expected to be moderate for the rest of the year and into 2020 at or slightly below a 2.0% YOY pace.  It is primarily the US consumer that is providing this growth in the US economy.  Consumer spending rose 4.7% in Q2 and is expected to post a 2.5% gain in Q3.  The growth in consumer spending has more than offset the decline in business spending.  Business capacity and infrastructure spending has fallen for all of 2019: down 0.3% in Q1, 2.0% in Q2.  While the trade war may be hurting overseas economies more directly than the US economy, the uncertainty around trade and its impact at home and abroad would seem to be a large contributing factor in the decline in US business spending and the pallor over overseas economies.

As US and overseas GDP growth slows, Central Banks at home and abroad have moved to lower interest rates.  This looks to be a rather knee-jerk reaction as the current low, and even negative, interest rate environment has not been an impediment to economic growth either in the US or overseas.  Contributing factors in the Fed’s actions in lowering US interest rates may be in part a desire to spark inflation as a way of maintaining economic growth and an attempt to maintain its independence by acceding to political pressure from the Executive Branch.  In either case, there seems precious little that these actions will do to stimulate economic growth until and unless there is more certainty around global trade and economic policy (such as Brexit).

The real danger to the US economy is that the consumer stops spending and business stops hiring.  Research has shown that that business freezing hiring is a much stronger leading indicator of a possible recession than layoffs.  US unemployment is holding steady at 3.7%; wage growth is running at a 3.2% YOY pace, still well below the historical average of 4.1%.  These two figures and the residual impact of recent tax cuts may be contributing to consumer confidence.  What will be important to watch are the non-farm payroll numbers, currently running at between 120,000 to 150,000 per month.  A significant decrease in non-farm payrolls may well be the trigger that eventually causes the US consumer to stop spending and the American economy to decline from current levels and even turn negative.        

Until that time, asset markets seem likely to see continued volatility but without a sustained sell off.  US equities are trading at historic P/E ratios (approximately 16x earnings) and corporate earnings are expected to continue to grow at mid- to low-single digits into 2020 (S&P 500 earnings per share currently 4.9% YOY).  Bond prices are rising due to Central Bank easing, but yields are poor - the 10 yr US Treasury is at 1.5% - or non-existent - 10 yr German Bunds at -0.70%.  In times like these, it is important to remain focused on the long term and invest through any short-term uncertainty. 

Administration

Form 5500 Season – Ready, Set, File! 
It’s that time of year again!  For calendar year plans, the 2018 Form 5500 and Form 8955-SSA (if applicable) must be filed by July 31, 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.  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. 

View our Compliance Calendar to see other important administrative tasks. 

Beware Your Definition of Compensation 
Your retirement plan document includes a definition of compensation and it is important that you follow this in operating your Plan.  The improper application of the definition of compensation can quickly become a compliance pitfall.  For example, plan sponsors might assume contributions are solely based on an employee’s base pay amount.

The most commonly used definition of compensation for 401(k) deferrals is “W2 wages.”  It is important to remember that this particular definition allows for 401(k) deferral contributions beyond “salary.”  For example, plan sponsors must allow participants to extend deferral contributions to bonus payments and to “K-1 earned income,” unless these items are explicitly excluded from your definition of compensation.   

Please be sure to review how your Plan defines compensation with your payroll and/or accounting team to ensure that your practices are in line with your plan document.  

New Flavor of the Month:  After-Tax Contributions 
There has been an increased awareness of contributing after-tax dollars into a 401(k) plan.  These contributions are separate from pre-tax or Roth contributions and allow participants to contribute after-tax dollars into their 401(k) account up to the total 2019 maximum employee plus employer contribution of $56,000 ($62,000 with catch-up).  While we support any provision that encourages and allows participants to save more for retirement, after-tax contributions are not for everyone or every plan.   

First and foremost, this provision must be allowed by an amendment to your plan and there must be a separate money-type set up to account for these contributions with your payroll vendor and recordkeeper.  Second, after-tax contributions are not matched.  Hence, participants should first consider maximizing their pre-tax and Roth deferrals, which are matched.  Finally, it is usually only highly compensated employees that can take advantage of contributing after-tax dollars.  This can lead to the failure of non-discrimination testing, either the Average Contribution Percentage or top-heavy tests.   

Our After-Tax Contribution Overview is linked here.  Please let us know if you would like to discuss in greater detail whether these contributions are appropriate for your retirement savings plan.    

401(k) News

A Patchwork of Retirement Savings Legislation is Moving Through Congress 
A number of different bills aimed at updating current retirement savings legislation are moving through Congress.  The final legislation that comes out of the Conference Committee between the House and Senate versions are still unclear.  However, some of the notable provisions in the various bills include: 

• The extension of Multi-Employer Plans (aka, Pooled Employer Plans) to non-associated companies
• Allowing for electronic distribution as the default for all required notices
• Mandating a retirement income estimate be provided for all participant accounts
• Mandating Auto Enrollment
• Extending the required minimum distribution age

We will keep you apprised of which provisions ultimately make it through Congress and into law. 

Market Update

After a tumultuous May, the first half of 2019 ended positively for all asset classes.  Year-to-date (“YTD”), the S&P 500 Index is up 18.5%, the MSCI EAFE Index (foreign equities) up 14.49% and the US Aggregate Bond Index up 6.11%.  Much of the rally, in both equity and bond markets, seems to be a result of the increased expectation that the Fed will lower interest rates in the third and possibly fourth quarters.  While this may have helped markets in the short-term, economic fundamentals would seem to point to more difficult markets ahead.   

US economic growth in Q1 2019 came in at 3.2% year-on-year (“YOY”) and is expected to fall to between 1.0% - 2.0% YOY in the second and third quarters.  This moderation in US economic growth has been anticipated as the stimulative effects of 2018 tax cuts and fiscal policy diminish.  This should lead to a US GDP growth of around 2.0% for 2019, which is a return to the level generally seen during the length of the current expansion.  Unemployment remains low at 3.6%.  Seen against the background of slower economic growth and decreased workforce participation, it is hard to see unemployment falling much further.  The consumer continues to lead the US economy with consumer spending surprisingly strong in April.  This is in sharp contrast to continued low levels of corporate investment spending and the rise in inventories.  While US economic growth is off its recent 2018 highs, the picture is one of a slow-down and not recession.    

When the Fed announced in Q1 the end to the current round of Fed Fund rate increases, the real Fed Funds (nominal rate less inflation) was 0.66%.  This compares to an average of 3.38% after the previous six Fed rounds of tightening.  The Fed raised rates by 0.68% per year during the current round of tightening, compared to an average of 2.04% per year in previous tightenings.  During this round of Fed tightening, US economic growth actually spiked.  Thus, it is hard to see how lowering interest rates will stimulate economic growth; the level of interest rates does not appear to be a significant factor in stifling economic growth.   

So, we must look toward inflation as the reason for a possible Fed rate cut.  Inflation in the US remains subdued and well below the Fed’s target of 2%.  The Fed’s Headline Personal Consumption Expenditure (“HPCE”) deflator is at 1.5% and Core PCE (excluding food and energy) is at 1.6%.  The Fed has described the current level of inflation as “transitory.”  It is precisely the desire to stimulate inflation that seems to be motivation for the Fed signaling the possibility of a Q3 rate cut.  But with investment spending low, wage growth flat (+3.4% in May), and US oil production more than able to keep oil prices around $55/barrel in the face of announced decreases in OPEC production, it is hard to see this as anything but a very stable inflation environment.   

The Fed’s decision to cut rates in July is likely to be based whether there is an agreement on trade, the June jobs number, and the initial Q2 GDP figure.  Equity and bond markets seem to have largely priced in a Fed Funds rate cut in July.  Traders will be severely “wrong-footed” if the Fed decides not to cut, with the possibility of a significant sell-off of both bond and equity prices.  Though down from the double-digit growth of 2018, S&P 500 corporate earnings per share rose 4% YOY in Q1 2019 and are generally expected to continue to see mid-single-digit growth for the rest of the year.  But US equities are once again fully valued with forward P/E ratios trading at 16.74x, back above the long-term average of 16.19x.  Against the background of moderate economic growth, stable employment and inflation, it is difficult to see equity price appreciation at the same double-digit rate recorded in the half of 2019.  Bond markets may continue to see price appreciation with a Fed cut, but with the 10 yr Treasury yielding 2.0% at the end of June, bonds are effectively at the rate of inflation.  On a relative basis, equities yield is still better than bonds for those investors looking for income.  Yet if a worst-case scenario eventuates - the Fed’s anticipated rate cuts do not result in either a pickup of inflation or economic growth - then bonds do offer their traditional “insurance” role against a fall in equity prices.  Among fixed income products, US Treasuries are historically the least correlated asset class to US equities, with high-yield and convertible most highly correlated.  A balanced portfolio will want to have both quality equity and bond exposure to guard against any one of a number of possible scenarios for the rest of 2019.

Administration

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, due on July 31^st or October 15^th if your plan has been put on extension.

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).  Special attention should be paid to the IRS definition of a “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.

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

Avoiding Excess Participant Deferrals

Many employers have been faced with the necessity of returning money to participants due to the participants exceeding the annual 401(k) deferral limit.  The issue of participants over-contributing to their 401(k) plans is potentially avoidable with the right education and proper practices in place. 

The problem:

IRC Section 402(g) limits the amount of elective deferrals a participant may exclude from taxable income in the participant’s taxable year.  When a participant exceeds these limits, then the excess deferrals above the legal limit (with allowable earnings) must be returned to the participant and added to their gross income for that year.

Tips to avoid this pitfall:

First and foremost, check with your payroll provider to ensure that there are caps in place that align with the annual 402(g) limits.  For example, make sure that for 2019, employees would not be able to defer more than $19,000 (if under age 50) or $25,000 (if over age 50 and catch up contributions allowed).  Quite often excess deferrals are a result of new hires not informing HR or Payroll of deferrals they made at their previous employer. 

The second tip is to make the question part of your onboarding practice.  Provide a document to your new employees, which points out the annual deferral limits and provides information about how past deferral amounts may affect how much they are able to save for the rest of the year.  Having an onboarding document speak to past 401(k) deferrals would also enable you to obtain actual amounts (maybe even a statement) that you could then forward to your current recordkeeper to keep contribution figures as accurate as possible.  Feel free to use the sample document linked here which we drafted for plan sponsors.

401(k) News

California Hopes to Enable More Workers to Save for Retirement with CalSavers Program

The CalSavers Retirement Savings Program launched their pilot program in November 2018.  It will open for registration to all eligible employers beginning July 1, 2019, subject to pending litigation.*  California employers (with at least 5 employees) who do not offer an employer-sponsored retirement savings plan will be required to facilitate CalSavers.  There is a three-year phased rollout, with staggered deadlines for registration based on employer size.  All eligible employers can join at any time prior to their registration deadline.

Note: CalSavers is a program only required for employers who do not offer their own company-sponsored retirement plan, such as a 401(k) plan.

Important Facts about CalSavers:

• Employers serve a limited role: facilitate the program and submit participating employees' contributions via simple payroll deduction.
• Employees are responsible for their investment choices
• Employers cannot make contributions
• The CalSavers account is a Roth IRA (after tax)
• The default savings rate is 5% of gross pay, and employees can change their rate at any time
• Employees will be auto-enrolled after 30 days and will begin saving through payroll contributions
• Participants can opt out at any time

*Various groups are challenging the law and attempting to invalidate the program.  The general consensus, however, is that employers who are required to participate should comply with program deadlines.

Market Update

In Q1 2019, the markets gained back most of what was lost in Q4 2018 even as economic fundamentals weakened.  Attractive valuations at the start of the year buoyed equity markets; the announcement by the Fed of the end of the current round of interest rate rises helped bond markets.  This buoyancy may have also helped the first tech IPO for the year, Lyft, which listed on the last day of the quarter at the high end of its target range. 

The S&P 500 ended 2018 down 6.2% year-on-year (“YOY”) at 2,505.85, after having touched its all-time high of 2,914.04 in August.  The index rallied back in Q1 2019 to finish the quarter up 13.1% at 2,834.40.  Though fixed income yields rose over the course of 2018 (US 10 Treasury high of 3.20% in October), the 10-year yield finished Q1 2019 at 2.41% and the BarCap US Aggregate Bond Index was up 2.6% for the quarter.  Even Overseas Developed and Emerging Markets managed to rally in the first quarter of 2019, with the MSCI EAFE developed market index rising 10.13% and the MSCI Emerging Markets Index up 9.95%. 

The anticipated slowdown in US economic growth became apparent in the first quarter.  Tax cuts and fiscal spending in 2018 had pushed US GDP growth to 3.0% year-over-year (“YOY”) in Q4.  This rate of growth was not seen as sustainable and the government shutdown at the beginning of 2019 only hastened this decline.  Q1 2019 US GDP growth is expected to come in flat up 1% YOY;  for the full year, 2019 US GDP growth is expected to revert back to its pre-2018 level of 2.0% YOY.   Unemployment in February was steady at 3.8%, even with the hugely disappointing non-farm payroll increase of only 20K.  Wage growth remained at 3.2%, still well below its historical average.  While oil prices have crept up to $59 from the recent bottom at $45 per barrel (Q4 2019), inflation is not expected to increase from its 2% level anytime soon. 

The specter of diminished US economic growth and the low inflation helped the Fed come to the decision in March to end the current round of interest rate increases.  If this is in fact the peak in the current cycle of Fed tightening, it is remarkably low.  A Fed Funds rate at 2.4%, 10-Yr Treasuries yielding below 2.5% and inflation at or below 2% are all very low historically.  In addition, the restructuring of the Fed’s balance sheet has been accomplished with minimal disruptive impact on financial markets or the economy.  Excess reserves have declined much faster than expected, and the Fed announced it will begin to reduce the shrinking of its balance sheet from the current $50B per month to $35B per month by the end of September.  This is a possible indication that the Fed sees both current economic and monetary conditions as accomplishing it’s hoped for “soft-landing” to the current phase of economic growth. 

The picture overseas is similar to that in the US.  European GDP growth is off its peak of 2.4% in 2017 and came in at around 1.9% for 2018.  Projections are for it to slip further and end 2019 at around 1.5%.  Similarly, Chinese GDP growth is off its recent high of 6.9% in 2017, coming in at 6.6% in 2018, with estimates between 6.0% to 6.5% for 2019.  The Global Purchasing Managers’ Index fell from 52.0 in November 2018 to 50.6 in February 2019 with most of this drop coming from trade reliant economies such as Germany (44.1), Taiwan (49.0) and Korea (48.8).  The possibility of a trade deal between China and the US will help eliminate the uncertainty that has affected Emerging Market economies, in particular.  However, without the clear prospect of a UK exit deal, Brexit will weigh heavily on the UK and European economies. 

Slower economic growth and the prospect of a neutral to slightly easier monetary stance on the part of the world’s central banks may see markets move increasingly more toward income generating assets rather than growth.  US High-yield, REITs and EM Debt would seem to be areas that could benefit from these trends along with equity stalwarts such as utilities.  The successful IPO of Lyft at the end of the quarter was a piece of good news for the growth stocks, however.  There are a number of other technology companies in line to list this year – Uber, Pinterest, Slack, Postmates - all of which will look to the Lyft IPO as a harbinger of investor interest in technology shares going forward.

Administration
2018 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 2018 census data now to ensure timely results and processing of any potential refunds.

Be sure to submit your annual census data and compliance questionnaires to your recordkeeper by their specific deadline (typically no later than January 31^st, though some recordkeepers have stricter deadlines) to ensure delivery of testing results before March 15^th.  Any ADP refunds made after March 15^th will be subject to a 10% employer excise tax.  Please contact Vita Planning Group if you have questions regarding your record-keeper’s requirements.

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

401(k) News
Hardship Withdrawal Changes Take Effect in 2019
The Bipartisan Budget Act of 2018 included a number of changes to the hardship provisions of 401(k) plans that take effect on January 1, 2019.   The most significant of these are: 

• the removal of the six-month suspension on participant deferrals after a hardship withdrawal,
• the inclusion of earnings as a money source for hardship withdrawals,
• the removal of the “loan-first” requirement before taking a hardship withdrawal,
• the removal of the need for the IRS/DOL to recognize a Federal Disaster, if already done so by FEMA, in order to take a hardship withdrawal for a “casualty loss”  related to a disaster.

Your recordkeeper should have these changes included in their systems for the administration of hardship withdrawals.  Please let us know if you have any questions about these changes. 

Market Update
The markets ended 2018 much as they began: heightened volatility leading to a significant fall in US equity prices despite continued strong economic fundamentals.  The S+P 500 ended 2018 down 6.2% year-on-year (“YOY”) after having touched its all-time high of 2,914 in August.  Though fixed income yields rose over the course of the year (US 10 Treasury high of 3.20% in October), the BarCap US Aggregate Index pared down early losses to finish flat (-0.10%) for the year.  Overseas Developed and Emerging Market Equity were the worst performing asset classes, falling 13.4% and 14.2%, respectively, in US Dollar terms.  Despite market movements in 2018, there is ample reason to expect that US economic growth will remain intact into 2019 and not justify the recent equity market declines.            

US GDP growth accelerated over the course of 2018, reaching 3% YOY in Q3.  Much of that growth seems to have been a result of the positive impact tax cuts had on consumer spending.  Without new tax cuts, this impact should diminish entering 2019, with expectations for US GDP growth to return to the 2.0% per year rate that it recorded from 2010 to 2016.  The US economy should be able to maintain this rate of growth into 2020 because of two factors: 1) none of the economy’s cyclical sectors (housing, autos, business investment, inventories) are overextended, and 2) inflation remains stable, such that when the Fed does end its current tightening (toward the end of 2019) it will be at a much lower level of interest rates than is typical for an expansion of the length the economy is experiencing.   Even though unemployment in December ticked up to 3.9%, 2.6 million new jobs were created in 2018, the highest figure since 2015.  Wage growth remained at 3.2%, still well below its historical average.  Coupled with oil prices falling to around $45 per barrel (from a high of $73 in Q3) and expected to remain low, not only should inflation remain in check but low- and middle-income consumers should experience a boost to their disposable incomes.

The picture overseas is not as rosy, but it is certainly not bleak.  European GDP growth is off its peak of 2.4% in 2017 and should come in at around 2.1% for 2018, though European unemployment continues to fall, currently running at 6.7%.  Similarly, Chinese GDP growth is off its recent high of 6.9% in 2017 but should come in at around 6.5% in 2018.  The Global Purchasing Managers’ Index fell from 52.0 in November to 51.5 in December, with most of the drop coming from Emerging Markets, where the threat of a trade war and the continued strength of the dollar and rising interest rates are having the greatest negative impact.        

So with all the good news in the economy as a whole, why have markets fallen so much in 2018?  We feel there are two reasons.  One, is technical in that US T-Bills (Government bonds of 1 year or less) are now yielding 2.5% meaning that many momentum and algorithmic traders moved to “risk-off” positions (i.e., selling equity positions).  The other is the uncertainty caused the very acrimonious and public posturing over tariffs, the US Government shutdown and FED policy.  In theory, a trade war does have the potential to cause domestic prices to rise.  However, the relative muted tariffs that are being suggested against China are estimated to raise consumer prices by approximately 0.4% if all those costs are passed through to the economy.  The shutdown of the US Government diminishes US GDP Growth by approximately 0.2% per month.  As indicated above, the level of US interest rates are historically very low and the FED’s very gradual tightening over the past two years has not inhibited economic growth.  None of this is catastrophic.  But until and unless the noise around a trade war, the US Government shutdown and criticism of the FED ends, uncertainty and negative sentiment could continue to weigh on markets. 

If we do see an end to these areas of uncertainty, then markets can finally focus on the very good market fundamentals that exist in the world.  US GDP growth has resulted in 8% revenue growth among S+P 500 companies in 2018, in sharp contrast to the cost saving that pushed most earnings growth after 2009.  US earnings rose an astounding 25% in 2018.  Forecasts for 2019 show a slowing but still in high single digits (7-8%).  The fall in US equity prices has brought the forward P/E ratio of the S+ P 500 to 14.4x, well below the 25 year average of 16.1x.  Overseas, the forward P/E ratios for the ACWI Index ex. US is at 11.5x well below its 20 year average of 14.2x.  Assuming the Fed sticks to its announced policy and institutes at least one more rate rise in 2018, US fixed income should see the best opportunities in credit (i.e., corporate bond and high yield markets) as opposed to duration (long duration Government bonds).  2018 is not 2008. Fundamentals both at home and abroad are much stronger than they were a decade ago and do not justify the recent fall in asset prices that we experienced over the course of 2018.    

Overview
The Internal Revenue Service has announced the 2019 cost-of-living adjustments (COLAs) to the various dollar limits for retirement plans.  The Social Security Administration (SSA) has also announced the taxable wage base for 2019.

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.

401(k) News
Welcome Scott Strauss, our new Compliance Specialist!
Scott Strauss joined Vita Planning Group this week as our Compliance Specialist.  He brings more than 20 years of experience working with a wide range of qualified retirement plans.

His experience covers both defined contribution 401(k) plans and defined benefit pension plans.  Scott has worked both as an advisor, with American Benefit Plan Administrators and Wellman & Murray Lawyers, and an administrator, for the City of Portland and Precision Castparts Corp. benefit plans.  This gives Scott an unparalleled perspective on retirement plan design as well as experience across the broadest range of compliance and operational issues.  Scott is a native Oregonian and proud alumni of the University of Oregon in Public Administration.

Administration
10 Days Left to File Your Form 5500!
For calendar-year plans currently on extension, Monday, October 15, 2018 is the deadline to file the Form 5500 and Form 8955-SSA.  Please note, the DOL website is subject to high traffic on October 15th so be sure to file as soon as you are available to and avoid the last minute rush!  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.

Year-End Participant Notifications
As we wrap up 2018, 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.

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

Market Update
There is very little ‘new’ to report in this quarter’s market update. The same pattern that we saw in Q2 continued in Q3. The US economy remains strong, the Fed continues to raise interest rates and the trade war looms. The result was another positive quarter for US equity markets, but continued struggles in the US bond and international equity markets. The S+P 500 was up 7.7% in the third quarter, resulting in a year-to-date (“YTD”) rise of 10.6%. The BarCap Aggregate US Bond Index was up ever so slightly: 0.02% in Q3, bringing the YTD result to down 1.60%. Emerging Market equities also improved somewhat in the Q3, helping the MSCI All World Country Index (“AWCI”) ex-US to gain 0.71% in Q3, and paring its loss down to -3.09% YTD. The economic data suggests that Q4 markets will be little different, unless politics get in the way – the mid-term elections or trade rhetoric that turns into a trade war.

US economic fundamentals continue to be very strong. Q2 2018 US GDP growth was revised to 4.2% which translates to 2.3% year-on-year (“YOY”). Q3 growth looks to come in at between 2.5% to 3.0%, which would bring YOY growth to 2.8%. Consumer spending and corporate investment were strong in Q2 and the beginning of Q3, accounting for much of the GDP growth. Much of this is the result of tax cuts and fiscal stimulus enacted at the beginning of 2018, which is expected to underpin economic growth through the beginning of 2019. Unemployment remained low, at 3.9% in August and wage growth remained muted at 2.8% in August. For some perspective on these two figures, the US unemployment rate has averaged 6% over the past 50 years while wage growth averaged 4.2% in the same time.

The low level of wage growth has helped to keep inflation in check, even in the face of rising energy prices. Oil prices have more than doubled in the 18 months since the most recent low in January 2016. West Texas Intermediate was at $73.55 at the end of September 2018, up from $33.62 in January 2016. This has caused “headline” inflation to rise to 2.7% even though core inflation (excluding food and energy) remains at 2.2%. In theory, a trade war does have the potential to cause domestic prices to rise. However, the relative muted tariffs that are being suggested against China are estimated to raise consumer prices by approximately 0.4% if all those costs are passed through to the economy. Against this background of strong economic growth and the muted rise in inflation, the Fed has made it clear that it intends to maintain its policy of raising interest rates. The market is expecting at least three more rate increases between now and June 2019.

Overseas equity and bond markets have been quite hard hit by both the strong US dollar and the impact of rising trade barriers in 2018 but are starting to make a bit of a comeback. The rise in the US dollar that has been a feature of the global economy in the first half of 2018 stalled over the summer. This has brought some respite to emerging markets, which had been quite hard hit all year. Developed markets, Europe in particular, are showing good fundamentals. Eurozone GDP growth is tracking at 2.0% annualized and unemployment continues to fall, recording 8.1% in August. Demand for credit and the Purchase Manager Index in Europe both remain strong. This is supportive of overseas valuations. The ACWI ex-US forward P/E ratio is 12.9x compared with a 20 year average of 14.3x. This compares to the S&P 500 forward P/E ratio of 16.8x vs a 20 year average 15.9x.

Finally, one highly technical change that happened at the end of September is the reclassification of telecoms companies by the Global Industry Classification Standard (GICS). A new “Communications Services” sector has been created to replace “Telecoms”. Going forward, the Communication Services sector will include companies that had previously been in either “Technology” or “Consumer Discretionary”. As is shown in the chart below, this change will create the fourth largest sector in the S&P 500 Index. There is no action you need to take that relates to your 401(k) Plan’s investment array. However, we will most likely see higher volatility in index funds during Q4 2018 as they come to grips with the new classifications.