Starting in March 2022, all employees will have a retirement plan available through 401k.
The Retirement Security Act of 2021 (also known as the SECURE 2.0 Act) was passed by the House of Representatives on March 29, 2022. The measure aims to build on the original SECURE Act of 2019 and provide additional improvements to the retirement savings industry.
Below is a summary of the key provisions that would apply to existing retirement plans:
- Raise the required minimum distribution age from 72 to 75 by 2032.
- Require that all catch-up contributions be subject to Roth tax treatment and increase the allowance for participants aged 62 to 64 by an additional $3,500 (for a total of $10,000 in catch-up contributions).
- Allow employers to make contributions to an employee’s retirement account based on the employee’s personal student loan repayments.
- Allow employer matching contributions to be made as Roth contributions.
- Mandatory eligibility for part-time employees who work more than 500 hours for two consecutive years.
- Creation of a national registry of lost and found retirement savings to help locate missing participants.
- Penalty-free withdrawal exception for participants experiencing domestic abuse.
- Require newly established plans to implement an automatic enrollment feature (not applicable to existing plans).
Now that the bill has been approved by the House, the legislation will move to the Senate for possible action later this spring. There are other bills that overlap with these objectives, so please be aware that certain details may change as these bills progress through the legislative process.
As with any major reform, we expect there to be a period of time between the enactment of this legislation and when new changes are implemented in retirement plans, as service providers will first need to update their systems and records to align with all the new provisions. We hope to keep you informed about any updates and progress on the SECURE 2.0 Act.
To Crypto or Not to Crypto?
Cryptocurrency, also known as “crypto,” is a digital currency that does not have a central issuing or regulatory authority (like a central bank such as the Federal Reserve) and instead uses a decentralized system to record transactions and issue units. Cryptocurrencies have surged in notoriety and public attention in recent years, leading employers to wonder: are cryptocurrencies an investment option that we should include in our retirement plan? Our current answer to this is a resounding No.
There have been two relevant developments in the world of digital currencies:
On March 10, 2022, the Department of Labor issued guidance on 401(k) plan investments in “cryptocurrencies,” warning that “… fiduciaries should exercise extreme caution before considering adding a cryptocurrency option to a 401(k) plan…”. The guidance reminds plan sponsors that they may be personally liable for cryptocurrency investments that do not meet “a high standard of professional care” and that they “cannot shift the responsibility to plan participants to identify and avoid imprudent investment options, but must evaluate the designated investment alternatives made available to participants and take appropriate steps to ensure they are prudent.”
On March 28, 2022, Representative Stephen Lynch, chair of the House Financial Services Committee’s fintech task force, introduced the Electronic Currency and Secure Hardware Act (also known as the ECASH Act). The bill instructs the Secretary of the Treasury to “develop and test digital dollar technologies that replicate the privacy features of physical cash, in order to promote greater financial inclusion, maximize consumer protection and data privacy, and advance U.S. efforts to develop and regulate digital assets.
While these two developments may seem contradictory, they reflect the ongoing search in Washington, D.C. for the government’s role in regulating and/or developing digital currencies.
We will continue to monitor this space as we expect to hear more about cryptocurrencies and their potential (or prohibited) role in retirement plans.
Administration
Time for Independent Audit for Large Retirement Plan Filers
As the non-discrimination testing season for calendar year retirement plans is concluding, steps must be taken to complete the annual independent audit. The independent audit report must be included with the filing of Form 5500, which is due on July 31 or October 15 for plans on an extended filing deadline.
The independent audit requirement applies to employers sponsoring “large” plans: those with more than 100 participants on the first day of the plan year (January 1 for calendar year plans). There are special rules that allow growing companies to exceed 120 participants before being subject to the audit requirement, and thereafter, they must remain subject to the requirement as long as they stay 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 Compliance Calendar online.
Plan Document Update
We are nearing the end of the current Third Cycle Plan Document Restatement period. 401(k) and 403(b) plans that use an IRS pre-approved plan document created by their record keeper or an external administrator must complete this update process by July 31, 2022.
Many plans will have already completed the plan document update process; those that have not should contact their record keeper to ensure compliance with the update deadlines.
CalSavers
An important deadline is approaching for California employers (with 5 or more employees) who do not sponsor a company retirement savings plan. Employers without a retirement plan must offer a workplace savings plan or enroll in the state-required CalSavers Retirement Savings Program by June 30, 2022.
Employers who already offer a retirement plan to employees are exempt from CalSavers and must report the exemption online if they have not done so already. For more information about CalSavers, visit Calsavers.com.
Market Update
All asset markets finished the first quarter of 2022 down, but there were signs of resilience despite the triple hit of rising Omicron COVID infections worldwide, increasing interest rates in the U.S., and the Russian invasion of Ukraine. In U.S. stock markets, the S&P 500 rebounded from its low of -13% on March 14 to finish the quarter down 4.6%. Bond markets fared worse, experiencing a steady, one-directional decline throughout the quarter, with the BarCap US Aggregate Bond Index finishing down 5.9%. Foreign equity markets also experienced a steady decline, with the MSCI All Country World ex US Index down 4.7% for the quarter. European markets were more directly affected by the events in Ukraine, while emerging markets were less so. One reason is that Russia’s weight in the MSCI Emerging Markets Index has been steadily decreasing.
The U.S. economy has continued its strong performance. The U.S. economy is now 3.4% above pre-COVID levels. Although GDP growth for the fourth quarter of 2021 was 5.5% year-over-year, the rise in Omicron COVID cases, along with inventory buildup at the end of 2021, may lead to weaker GDP growth in the first quarter of 2022, estimated between 1% and 2%. However, by the end of the second quarter of 2022, U.S. economic growth should return to its 20-year trend of 2% annually. An interesting impact of the COVID recession has been on U.S. productivity. Since 2020, U.S. productivity has increased by 2.7% annually, more than double its 20-year average, largely driven by more efficient work practices (such as conference calls, remote work, etc.) and the use of online retail. While many of these productivity gains may be permanent as part of a “new normal,”
Unemployment in March 2022 was 3.62%. This is 40% below the 50-year average of 6.2%, and there have only been five months since 1961 with a lower unemployment rate. The JOLTS job openings index shows a gap of 3.5 million between the number of jobs and the unemployed: there are 1.89 job openings for every American looking for work. This situation has resulted in accelerated wage growth. Wages in March grew at an annual rate of 6.7%, well above the 50-year average of 4%. The U.S. does not have the demographic growth to meet labor demand, so unemployment is expected to remain at these historically low levels. The lack of labor force participation in the U.S. will restrict long-term GDP growth; in the short term, it will continue to put pressure on wages, contributing to inflation in the U.S.
The resurgence of inflation, the dramatic rise in oil prices, and sanctions against Russia have led some economists to predict the return of “stagflation” (low GDP growth and high inflation) reminiscent of the 1970s. However, it is important to maintain some perspective on how current economic conditions are different. First and foremost is the fact that the U.S. does not rely on imported oil. Energy as a percentage of consumer spending has decreased from 10% in the 1970s to 4.3% in February 2022, and oil imports have fallen from 3.2% of GDP in 1979 to zero by the end of 2021. Yes, rising energy prices will be a drain on U.S. consumer finances, but it should be temporary as higher oil prices bring back currently idled U.S. capacity, and those additional dollars spent on oil will continue to circulate in the U.S. economy. Additionally, the finances of U.S. households are much healthier. In the 1970s, debt payment as a percentage of disposable income was 10.6%, rising to 13.2% during the Great Financial Crisis of 2008/09. Today it stands at 9.2%, and the net worth of U.S. households is at $162.7 trillion, nearly double the pre-recession peak of $85.1 trillion in 2008/2009. Finally, while the Soviet Union in the 1970s was styled as the champion of the Third World, including OPEC, against the West, today Russia has positioned itself as an enemy of national self-determination, and its invasion has provoked a rapid and unprecedented strong response from the West and most developing countries.
Asset markets now have to deal with geopolitical forces that were not present just three months ago. However, solid fundamentals should continue to present long-term opportunities for U.S. investors. U.S. corporate margins ended 2021 at a historic high of 14.3% (profits/sales). U.S. corporate earnings finished at $221 per share and are expected to continue growing between 10% and 20% in 2022. Historically, value stocks have performed better in a rising interest rate environment due to the prevalence of financial, energy, and industrial companies in this sector of the market. Within fixed income, high-yield, leveraged, and convertible loans have historically been the top-performing sectors when interest rates rise. Volatility will undoubtedly be a feature of the markets in 2022, but there will not be 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 outcomes. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. The information is based on data collected from what we believe are reliable sources. Its accuracy is not guaranteed, it is not intended to be comprehensive, and it should not be used as a primary basis for investment decisions. It should also not be construed as advice that meets the investment needs of any particular investor. Past performance does not guarantee future results.
Sources:
https://www.natlawreview.com/article/secure-20-what-employers-need-to-know U.S. Department of Labor Compliance Assistance Publication No. 2022-01 “401(k) Plan Investments in ‘Cryptocurrencies’.” https://ecashact.us/ https://employer.calsavers.com/home.html Unless otherwise noted, the data and commentary come from three sources from JPMorgan Asset Management: 1) Market Guide: Economic and Market Update for the U.S., April 4, 2022, and 3) JPM Weekly Market Summary from April 4, 2022. Article: “Russia’s Diminished Role in Emerging Markets” Article: “What is Stagflation…”
Disclosures:
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies worldwide, but they are generally not backed or endorsed by any government or central bank. Their value is derived entirely from market forces of supply and demand, and they are more volatile than traditional currencies. Cryptocurrencies are not insured by the FDIC or SIPC. Legislative and regulatory changes or actions at the state, federal, or international level could adversely affect the use, transfer, exchange, and value of cryptocurrencies.
The purchase of cryptocurrencies involves a number of risks, including volatile market price fluctuations or sudden declines, market manipulation, and cybersecurity risks. Additionally, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in investing in stocks, options, futures, or currencies.
Indices are not managed, and investors cannot invest directly in an index. Unless otherwise noted, index performance does not account for fees, commissions, or other expenses incurred. Returns do not include reinvested dividends.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities that is considered representative of the overall U.S. stock market. It is a market-capitalization-weighted index with each stock’s weight in the index proportional to its market capitalization.
The Bloomberg Barclays U.S. Aggregate Bond Index, or Agg, is a broad-based market capitalization-weighted bond index that represents investment-grade bonds with intermediate maturities traded in the United States. Investors often use the index as a benchmark to measure the performance of the U.S. bond market.
The MSCI All Country World Index ex USA Investable Market Index (IMI) captures a representation of large, mid, and small capitalization stocks in 22 of 23 developed market countries (excluding the U.S.) and 23 emerging market countries (EM)*. With 6,062 constituents, the index covers approximately 99% of the established global equity opportunity outside of the U.S.
The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in 21 emerging market 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.
