401(k) Update: Q2 2023


DOL Adjusts Counting Methodology for Defining Large Plans

In February 2023, the Department of Labor issued a change to the methodology for determining if a retirement plan is considered “large,” for the purpose of Form 5500 reporting and the need for an independent audit of a retirement plan.

The new guidance indicates that the 100-participant threshold for determining large plan status will be based only on the number of participants (actively employed and/or terminated) with balances as of the first day of each year. Previously this threshold included all eligible employees, even those with no balance. The revised methodology is generally seen as a welcome change for those smaller employers on the cusp of being considered a large plan. This change takes effect for plan years beginning on or after January 1, 2023.


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 the completion of the annual independent audit. The independent audit report must be included with the Form 5500 filing, due on July 31st or October 16th, 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 to be 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.

IRS Proposed Guidance on Forfeitures1

In February 2023, the Internal Revenue Service issued proposed regulations to define more clearly when and how plan sponsors should use forfeitures in qualified retirement plans. Forfeitures occur when unvested participant account balances are returned to the plan. While the IRS has frowned on forfeitures being carried over year-to-year, this is the first attempt to codify an already existing best practice.

The proposed guidance requires plan sponsors to use forfeitures no later than 12 months after the close of the plan year in which the forfeitures arise. The rule allows forfeitures to be used for any of the following:

  • Pay plan administrative expenses.
  • Reduce employer contributions.
  • Increase benefits in other participants’ accounts in accordance with plan terms.

In most cases, employers already have these elections in place. However, it is a good reminder to review your current practice and to confirm that your plan permits all available uses of applying forfeitures in order to maximize your ability to use them. The proposed rule would become effective for the first plan year beginning on or after January 1, 2024.

Market Update2

Despite concerns over banking fundamentals caused by the closure of Silicon Valley Bank (“SVB”) and the emergency purchase of Credit Suisse by the Union Bank of Switzerland, equity markets at home and abroad rose in Q1 2023. The US S&P 500 Index was up 7.36% in the first quarter, and the MSCI All Country World ex-US Index was up 6.48%. Those same concerns over the banking system led to a rally in Bond markets. The Bloomberg US Aggregate Bond Index finished the quarter up 2.96% on rising expectations that the Fed would end and possibly reverse its current round of interest rate hikes. Markets are now dealing with heightened expectations for negative economic growth in the US sometime in 2023 as businesses slow hiring and capital expenditure in order to protect margins and lending conditions tighten as banks focus on building their balance sheet and reserves.

The US Bureau of Economic Analysis (“BEA”) announced that the US economy grew at an annual rate of 2.6% in Q4 2022, meaning GDP for 2022 rose 2.1%.3 The Philadelphia Federal Reserve Bank’s survey of forecasters still shows positive GDP growth for 2023, of between 0.5 to 1.0%, but with possible negative GDP growth in the middle of the year.4 The biggest question for GDP growth is whether a banking crisis will lead to a possible repeat of the 2008 financial crisis. While the failure of SVB will bring focus on the regulation of small and regional banks, overall bank capitalization in the US is healthier than at any time in the past 30 years because of capital adequacy regulations implemented since the global financial crisis of 2008. But where the SVB failure may spill over into the rest of the economy is in the tightening of lending standards as banks focus on quality credit exposure, thus limiting the availability of capital for business spending and investment.

The one area of good news seems to be inflation. There seems to be a sustained downturn in inflation, with Headline YOY CPI falling month after month from its peak of 9.2% in June 2022 to 6.0% in February 2023. Inflation is expected to continue to fall throughout 2023 due to improved supply chain conditions and possible falling demand. The Fed has been quite forceful in raising interest rates over the past year to try and accelerate the downward pace of inflation and is still publicly committed to fighting inflation. This includes a 0.25% rise in the Fed Funds rate in March despite the financial strains on banks like SVB, and the Fed’s forward guidance, which indicates at least one more 0.25% rise in interest rates in 2023. However, cash bonds and futures prices show that markets increasingly expect the end of monetary tightening sooner rather than later.

Though early expectations forecast positive corporate earnings in 2023 from 2022, this may be difficult to realize as rising costs have hurt margins. The ability of firms to pass on price hikes due to inflation may have run its course, with the focus in 2023 shifting to managing costs to maintain margins. The mighty American consumer may not be there to help spend the economy out of recession. Consumer sentiment is low, tracking at about 60 compared with the long-term average of 85.6, consumer savings are weak, tracking at 4.5% of disposable income compared with the long-term average of 8.9%, and credit card debt is rising with the percentage of consumer debt to disposable income at 6.2%, up from the 2021 low of 4.5%.

Volatility will continue to plague asset markets this year as the congruence of high interest rates, tight credit conditions, and slower spending on the part of businesses and consumers make the US economy vulnerable to economic slowdown and recession. While the asset prices are significantly more attractive now than at the beginning of 2022, the headwinds identified above will continue to challenge investors in 2023.



1 https://www.federalregister.gov/documents/2023/02/27/2023-03778/use-of-forfeitures-in-qualified-retirement-plans
Unless otherwise indicated, data and commentary for the Market Update are sourced from three JPMorgan Asset Management sources: 1) Guide to the Markets – U.S. Economic and Market Update, 2Q 2023, March 31, 2023, 2) the “2Q 2023 Guide to the Markets Webcast” on April 3, 2023, and 3) Eye on the Market Outlook 2023, “Silicon Valley Bank Failure”, March 10, 2023. 


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, the 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.

Post a comment