401(k) Update: Q3 2020


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 30th 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 23rd 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.    

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