Employee retirement plan through 401k

Effective March 2022 all employees will have available retirement plan through
401k

The Securing a Strong Retirement Act of 2021 (aka SECURE Act 2.0) was passed by the House of Representatives on March 29, 2022. The measure is intended to build upon the original SECURE Act of 2019 and provide for additional improvements to the retirement savings industry. 

Below is an outline of key provisions that would apply to existing retirement plans:

• Raising the Required Minimum Distribution age from 72 to age 75 by 2032.
• Requiring all catch-up contributions to be subject to Roth tax treatment and increasing the allowance for participants ages 62 to 64 by an additional $3,500 (for a total of $10,000 in catch-up contributions)
• Allowing employers to make matching contributions to an employee’s retirement account based on the employee’s personal student loan repayments
• Permitting employer matching contributions to be made as Roth contributions
• Mandatory eligibility of part-time employees who work more than 500 hours for two years consecutively
• Creation of a national retirement savings lost and found registry to aid in locating missing participants
• Penalty-free withdrawal exception for participants who experience domestic abuse 
• Requiring newly established plans to implement an automatic enrollment feature (not applicable to existing plans)

Now that the bill has passed the House, the legislation will move to the Senate for possible action later this Spring. There are other bills that overlap these goals so please note that certain details may change as these bills move through the legislative process.

As with any major reform, we expect there will be a period of time between this legislation being enacted into law and when new changes will be implemented into retirement plans, as service providers will first need to update their systems and records to align with all new provisions. We look forward to keeping you informed of any updates and progress on the SECURE Act 2.0. 

To Crypto or not to Crypto? 

Cryptocurrency, also known as “crypto,” is a digital currency that does not have a central issuing or regulating authority (such as a central bank like the Federal Reserve) and instead, uses a decentralized system to record transactions and issue units. Cryptocurrencies have skyrocketed in notoriety and public attention over the last few years, and this has employers asking – Is crypto an investment offering we should make available 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:

1.  On March 10, 2022, the Department of Labor issued guidance on 401(k) Plan Investments in “Cryptocurrencies” cautioning “…plan fiduciaries to exercise extreme care before they consider 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 “an exacting standard of professional care,” and that they “may not shift responsibility to plan participants to identify and avoid imprudent investment options, but rather must evaluate the designated investment alternatives made available to participants and take appropriate measures to ensure that they are prudent.”
2. On March 28, 2022, Representative Stephen Lynch, Chairman of the House of Representatives Committee on Financial Services’ Task Force on Financial Technology introduced the Electronic Currency and Secure Hardware Act (aka ECASH Act). The bill instructs the Secretary of the Treasury “to develop and pilot digital dollar technologies that replicate the privacy-respecting 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 at odds to with each other, they speak to the search in Washington DC for the government’s role in the regulation and/or development of digital currencies.

We will continue to monitor this space as we expect to hear more about crypto and its potential place (or prohibited role) in retirement plans. 

Administration

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 completion of the annual independent audit. The independent audit report must be included with the Form 5500 filing, due on July 31st, or October 15th, 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 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 applies to your plan.

For other important dates on the horizon, download our online Compliance Calendar. 

Plan Document Restatement

We are coming to 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 recordkeeper or third-party administrator are required to complete this restatement process by July 31, 2022.

Many plans will have already completed the Plan Document Restatement Process; those that have not should reach out to their recordkeeper to ensure compliance with the plan restatement timing. 

CalSavers

An important deadline is on the horizon for California employers (with 5 or more employees) who do not sponsor a company retirement savings plan. Employers without a retirement plan are required to either offer a workplace savings plan or sign up for the state-mandated CalSavers⁴ Retirement Savings Program by June 30, 2022. 

Employers who already offer a retirement plan to employees are exempt from CalSavers and should report the exemption online, if you have not done so already. For more information about CalSavers, visit Calsavers.com. 

Market Update

All asset markets finished Q1 2022 down, but there were signs of resiliency despite the triple whammy of a spike in Omicron COVID infections globally, the rise of interest rates in the US and the Russian invasion of Ukraine. In the US equity markets, the S&P 500 bounced off its low of -13% on March 14th to finish the quarter down 4.6%. The bond markets fared less well, experiencing a steady, one-way decline throughout the quarter with the BarCap US Aggregate Bond Index finishing down 5.9%. Overseas equity markets also saw a steady decline with the MSCI All Country World ex US Index down 4.7% for the quarter. European markets were most directly affected by the events in Ukraine, but emerging Market less so. One reason is that Russia’s weight in the MSCI Emerging Market Index had been steadily declining, from a high of 10% in 2008 to just under 4% when MSCI removed it from the index on March 2, 2022. The other reason is that Emerging Market economies tend to have a higher percentage of primary industries hence may benefit from the increase of energy and other commodity prices. 

The American economy has continued its solid performance. The US economy is now 3.4% above pre-COVID levels. Although Q4 2021 GDP growth was 5.5% YOY, the spike in Omicron COVID cases along with inventory building at the end of 2021 may result in weaker GDP growth in Q1 2022 of between 1%-2%. However, by the end of Q2 2022, the US economic growth should be right back to its 20-year trend line of 2% per year. One very interesting impact of the COVID recession has been the impact on US productivity. Since 2020, US productivity has increased by 2.7% per year, more than twice its 20-year average, much of that driven by more efficient work practices (conference calling, working from home, etc.) and use of online retailing. While many of those productivity gains may be permanent, as part of a “new normal,” the constraint on GDP growth in the future will be labor force participation. 

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 rate of unemployment. The JOLTS index of job openings shows a 3.5 million gap between the number of jobs to those unemployed: there are 1.89 jobs for each one 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 US does not have the population growth to fill the demand for labor, so unemployment is expected to continue at these historically low levels. The lack of labor force participation in the US will constrain GDP growth over the long-term; in the short-term, it will continue the pressure on wages, adding to inflation in the US.

The re-emergence of inflation, the dramatic rise in oil prices, and sanctions against Russia caused some economists to predict a return of the “stagflation” (low GDP growth and high inflation) of the 1970s. However, it is important to keep some perspective on how current economic conditions are different. First and foremost is the fact that the US is not reliant on imported oil. Energy as a percentage of consumer spending has diminished from 10% in the 1970s to 4.3% in February 2022, and oil imports have declined from 3.2% of GDP in 1979 to zero at the end of 2021. Yes, the rise in energy prices will be a drain on the finances of US consumers, but it should be transitory as higher oil prices bring currently mothballed US capacity back online and those extra dollars spent on oil will be kept circulating in the US economy. In addition, the finances of US households are much healthier. In the ‘70s, 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 is a 9.2% and the net balance sheet of US households stands at $162.7 trillion, nearly twice the pre-2008/09 recession peak of $85.1T. Finally, whereas the Soviet Union of the ‘70s stylized itself as the champion of the Third World, including OPEC, against the West, today Russia has shown itself as an enemy of national self-determination and its invasion has elicited an unprecedently swift and strong reaction from the West and most developing countries.

Asset markets are now having to deal with geopolitical forces that were not present just three months ago. But strong fundamentals should continue to present opportunities for long-term US investors. US corporate margins finished 2021 at an all time high of 14.3% (earnings/sales). US corporate earnings finished at $221/share and are expected to continue to grow between 10%-20% in 2022. Value stocks have historically done better in a rising interest rate environment because of the prevalence of financial, energy, and industrial companies in this market sector. Within fixed income, high yield, leveraged loans, and convertibles have historically been the best performing sectors when interest rates rise. Volatility will most certainly be a feature of markets in 2022, but not 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 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. https://www.natlawreview.com/article/secure-20-what-employers-need-to-know
2. Department of Labor Compliance Assistance Release No 2022-01 “401(k) Plan Investments in “Cryptocurrencies”.
3. https://ecashact.us/
4. https://employer.calsavers.com/home.html
5. Unless otherwise indicated, data and commentary is sourced from three JPMorgan Asset Management sources: 1) Guide to the Markets – U.S. Economic and Market Update, 1Q 2022, December 31, 2021, 2) the “Q1 2022 Guide to the Markets Webcast” on April 4, 2022, and 3) JPM Weekly Market Recap of April 4, 2022.
6. Article: “Russia’s Diminished Role in Emerging Markets”
7. 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 around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency. 

Purchasing cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

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 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.

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.
National Association of Real Estate Investment Trusts

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.