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 firstname.lastname@example.org or by phone at (650) 567-9300.
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.
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.
- 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.
- Bureau of Economic Analysis - GDP News Release
- Second Quarter 2022 Survey of Professional Forecasters
- Article: "Powell says 'Inflation is much too high'..."
+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