401(k) Update: Q2 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.