401(k) Update: Q4 2021

Year-End Participant Notifications

As we wrap up 2021, 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.

To be distributed to eligible participants by December 1, 2021:

  • Qualified Default Investment Alternative Notice (applicable to Plans that have a QDIA)
  • 2022 Safe Harbor Notice (applicable to Plans with a Safe Harbor feature)
  • Automatic Enrollment Notice (applicable to Plans using Automatic Enrollment)

To be distributed to eligible participants by December 15, 2021*:

  • 2020 Summary Annual Report

(*This is the extended due date for Plans that filed a Form 5558)

Download our Compliance Calendar online to see what other important dates may be approaching.

 

Plan Restatements

Recordkeepers and administrators are currently in the process of restating all qualified retirement plans. Every six to seven years, the IRS requires retirement plans to be “restated” so that the Adoption Agreement of the plan is compliant with legislative changes that have been passed during the last few years. The current restatement process, called “Cycle 3” must be completed for all qualified retirement plans by July 31, 2022.

This is generally a straightforward process. Your recordkeeper will have had their “volume submitter” document approved by the IRS. The provisions of your plan will then be transferred to this new volume submitter document and sent to you for signature.

In the event your plan recordkeeper has not contacted you about restating your plan, please be aware that this process is happening for all plans and you should hear about it soon. Any questions or concerns, please contact us.

 

ESG Investing Methodology

One of the most difficult issues in the area of socially responsible investing, now generally known as ESG (Environmental, Social and Governance) Investing, has been the methodology around analyzing bond investments’ adherence to ESG principles. Vita uses the sustainability rating system of Morningstar, who have recently announced a new initiative beginning in November 2021 to expand their rating system to include government bonds, known as Sovereign Debt. This should enhance and expand the number of bond funds that receive a sustainability rating. Linked here is Morningstar’s FAQ: Incorporating Sovereign Debt.

 

Market Update (1)

Global markets were increasingly volatile in Q3 2021 and returns more difficult to come by. US markets were flat for the quarter while international equities were noticeably lower. Reports of supply chain difficulties and the prospects of rising inflation put a pallor over fixed income markets. The Chinese government’s policy tightening led to a crackdown on listed tech companies and the default of property giant Evergrande, giving pause to both international and US equity markets. Finally, markets had to again suffer through political wrangling in Washington DC over the infrastructure bill and debt ceiling. US equity markets were up in Q3 but well off the pace of the first half; the S&P 500+ added 0.6% in Q3 which left the index up 15.9% YTD. US bond markets finished the quarter virtually flat, with the BarCap US Aggregate Bond Index++ down 0.05%, pushing returns for the year down 1.55%. Overseas equity markets suffered the most as the MSCI All Country World ex US Index++ fell 2.99% in Q3, limiting the YTD gain to 5.90%.

The American economy continues to rebound from the COVID-19 pandemic recession, but growth may have stalled somewhat in Q3 2021. The Delta variant of the virus as well as supply chain problems have hurt both production and consumption right when businesses and workers are having to do with less direct support from the government. This has led many economists to reduce their estimates for Q3 2021 GDP growth to around 5%. This in contrast to Q2 US GDP growth at 13.4% and Q1 growth revised upward to 10.9%. Expectations are for an uptick in GDP growth in Q4, with full year 2021 GDP growth at between 6.5% to 7%. As we enter Q4 2021, output is back to the pre-COVID, Q4 2019 levels and GDP is on track to return to its 20-year average of 2% per year by the end of 2022. The $1.9 trillion “American Rescue Plan” passed in March should help bolster economic activity through 2021 and into 2022.

A tight labor market and inflation are growing concerns to US markets. Since losing 22.4 million jobs between February and April 2020, the US economy has recovered 17 million jobs, or 77% of those lost. The US unemployment rate in August was 5.2% and wages rose by 4.9% over pre-COVID levels. Wage growth coupled with a high level of job openings would indicate a continued tight labor market with unemployment falling more slowing and predicted not to reach pre-COVID levels until the end of 2023. Inflation has heated up as consumer demand has collided with disruptions in supply chains. The global semiconductor shortage, for example, has increased input prices in wide range of goods, most notably automobiles. Additionally, the cost of travel, entertainment and rents are starting to return to pre-pandemic levels. The FED’s measure of inflation, the PCE (“personal consumption expenditures”) Deflator, is up by more than 4% year-over-year (“YOY”), well above the FED’s target of 2%. The FED has said that current high rate of inflation is transitory and have projected the PCE Deflator to fall to 2.2% in 2022. While the FED’s commentary after its September 2021 meeting was slightly more hawkish in tone, the FED has consistently said it will be the combination of unemployment and inflation which will determine the end its current easy monetary policy and a rise in interest rates, previously not expected until sometime in 2023.

Along with economic growth, corporate earnings have also rebounded and are expected to reach an all-time high in 2021. Important sectors of the economy, such as technology, communications and consumer products, were able to grow earning right through the pandemic due to continued consumer demand and increased productivity. From here, earnings growth, like market returns, could be much harder to come by with slower economic growth, higher wages, higher interest rates and possibly higher corporate taxes negatively affecting margins.



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.
 

Sources: 

(1) Unless otherwise indicated, data and commentary is sourced from two JPMorgan Asset Management sources: 1) Guide to the Markets – U.S. Economic and Market Update, 4Q 2021, September 30, 2021, and 2) the “4Q21 Guide to the Markets Webcast” on October 4, 2021.
 

Disclosures:

+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.

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