Quarterly Market Performance Commentary
The U.S. stock market ended 2021 reaching record-high valuations despite the surge in COVID-19 cases in Q4. The highly contagious Omicron variant has taken hold around the world (see Figures 1A & 1B right) with cases “flattening the curve” vertically. The fast-spreading new variant stifled earlier hopes of a return-to-norm and hopefully economic recovery. It is difficult to predict exactly how the economy and markets will react to the prolonged nature of the pandemic. However, expectations regarding new and previously established COVID protocols, lock-downs, and strain on the already weakened supply chain appear likely to continue.
On top of the progressing pandemic, inflation concerns have been weighing heavy on the minds of investors. Annualized inflation rates remained elevated throughout Q4. December 2021 topped the charts with a reported all-items index inflation rate of 7.0% – the highest since June 1982.(1) While inflation was initially categorized as transitory, after reviewing data in the fall of 2021, Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen switched their stances and now claim that the term is no longer an accurate descriptor with high figures likely to continue into 2022.(2) Facing this new reality, the Federal Reserve’s Policy Committee announced that they will be moving to tighten monetary policy and raise interest rates sooner than previously anticipated. Markets have reacted to the news with volatility, as investors speculate the impact that this may have and the timeline that the new policy will follow.
Domestic Equity and Fixed Income
Equity returns in 2021 continued to soar, even after a relatively stagnant third quarter. Over the past year, the S&P 500 returned 28.70%, which is well above the long-term average of roughly 10.00%(3). From a sector perspective, Energy and Real Estate were the winners of 2021, returning 54.60% and 42.50% respectively. Meanwhile, Utilities and Consumer Staples were on the opposite end, yet still earning 17.70% and 18.60% over the past year(4). Spoiled investors have become accustomed to stock market “losers” generating nearly 20% returns over the last year.
For additional context, the Russell 2000 Index (an index measuring 2,000 small domestic publicly traded companies) returned +14.82%, the MSCI EAFE Index (an index measuring global stocks) returned +11.26%, and the Bloomberg US Agg. Bond Index (an index measuring the domestic fixed income market) returned –1.54% YTD.
When the pandemic spending bills were being debated in Congress back in 2020, one major concern was what the potential impact on inflation would be if trillions of dollars were instantly circulated in the market. A year later, we are beginning to see that inflation come to fruition with rates growing at the fastest inflation spike since 1982(5), according to the Department of Labor. With a visit to any grocery store you will see the increased cost of goods, particularly meat (see Figure 2, right).The Federal Reserve, who’s responsible for setting US Fiscal Policy, has announced its willingness to increase the federal funds rates as needed to tamper inflation(6). Their next meeting is scheduled for late-January, 2022.
Updated IRS Contribution Limits for 2022
In November 2021, the IRS announced its new compensation and contribution limits for qualified retirement plans, including 401(k)s, 403(b)s, SEP IRAs, and SIMPLE IRAs. An overview of the updated limits can be found in Figure 3 (see left).
At a high level, after being mostly stagnant from 2020 to 2021, the IRS has decided to increase the elective deferral limits for 401(k)s and 403(b)s to $20,500 – up $1,000 from the previous years. The catch-up contribution limit of $6,500 remains the same in 2022, although there is proposed legislation aimed to increase this limit in the near future. As inflation persists and wages grow, albeit slowly, the IRS continues to allow participants to defer more each year to save for retirement, providing an added benefit to participants.
Similarly, the IRS also increased the salary threshold for determining a Highly Compensated Employee (“HCE”) from $130,000 to $135,000, the annual match eligible compensation limit from $290,000 to $305,000, and the overall defined contribution limit from $58,000 to $61,000.
Fiduciary Correction Programs
In the event of an ERISA-defined fiduciary violation, plan sponsors are required to indemnify any harmed participants. Though most violations are accidental, corrective measures still must be taken to act in the best interest of the participant. Plan sponsors can utilize the Voluntary Fiduciary Correction Program, or VFCP, from the Department of Labor (“DOL”) to remediate these issues.
The VFCP was established in 2006 as a means for plan sponsors to identify and accurately correct certain violations of ERISA law(7). Without the VFCP, plan sponsors risked being audited and incurring potentially more severe penalties from unresolved issues. The VFCP allows plan sponsors to “get ahead” of any violations by proactively reporting them to the DOL, and consequently resolving the reported issues. There are roughly 19 violations that can be resolved by the VFCP, including but not limited to delinquent participant contributions, improper payment of plan expenses, and the purchase of assets from parties in interest8. A full list can be provided by your Forest Capital Management advisor, if needed.
If you believe your plan may be subject to a VFCP correction, do not hesitate to consult your advisor at Forest Capital Management. The program was designed to assist plan sponsors in coming forward in good faith to resolve plan issues and act in the best interest of plan participants. In nearly every instance, it is better to get ahead of any potential wrongdoing than to wait for the IRS or DOL to come knocking on the door!
Legislative Updates
To no one’s surprise, the Securing a Strong Retirement Act (“SECURE 2.0”) and the Retirement Security & Savings Act (“RSSA”) made little to no progress towards becoming law in Q4 2021. Legislators in the House introduced yet another retirement-focused bill titled the Retirement Improvement and Savings Enhancement Act of 2021 (“RISE Act”). These three bills in their respective chambers are each crafted to modernize retirement rules and regulations, many of which are perceived as outdated. Though the timeline is unspecified, there is optimism for movement in the latter parts of 2022.
When the SECURE Act 1.0 was passed in 2019, it too struggled to get floor time with adequate attention from lawmakers. Eventually, in order to get passed, the SECURE Act was amended as part of the much larger year-end spending bill of 2019. Some analysts predict the likely case will be that one of these three bills will be incorporated into a larger, more attention-grabbing, bill as well(9).
By way of content, the SECURE 2.0, RSSA, and RISE Acts all share several overlapping provisions. Notably, the RISE Act will establish an online “Retirement Lost and Found” to help employees keep track of their retirement plans from previous employers(10). While all three bills have yet to go through reconciliation between the two chambers of Congress, the exact provisions are likely to change. Regardless of what is finally passed, any material impact to your retirement plan will be communicated thoroughly from your recordkeeper.
Addressing Financial Wellness Inequities
A study published in 2021 by Origin, a financial management organization, found that women were disproportionately financially impacted by the COVID-19 pandemic. Only 38% of women reported feeling confident in their financial health, compared to 62% from men and, further, women were 10% more likely to report being in the same or worse financial situation than a year prior(11). The disparity between genders is clear, but what is not as clear is exactly how to support women in your workforce.
When trying to find a solution to any problem, you of course must start with finding the root of the issue. In order to make sense of the disparity between your employees, you must first understand their individual financial concerns. Do you have a young workforce that is mostly focused on paying down student loan debt? Do you have a middle-aged workforce who is focusing on affording college tuition for their children? Is a larger portion of your female base taking time off to be the homemaker while kids are out of school? Whatever challenges your employees are facing, meet them halfway and learn how to best support their needs.
Step two to addressing the disparity is strategizing and creating equitable benefits and compensation structures. As an employer, there are many levers you can pull to enhance your employees’ experiences, such as PTO, maternity/paternity leave, financial wellness programs, and education programs. A comprehensive program that addresses the needs of your employees will undoubtedly be well received.
Finally, as with any program, it’s important to modify your strategy for trends or changes as necessary. As you begin to adopt new policies and implement more personalized programs for your people, you will learn which programs work best and which need modification. A good place to start on the retirement-benefits side, is by recommending employees consult a financial professional like one of our advisors at Forest Capital Management. Our team is always an available resource to your employees to provide guidance and help them best succeed financially.
Auto Enrollment Explained
Enticing participants to join the 401(k) plan is a tough endeavor for any plan sponsor. Even if it’s in their best interest, participants often don’t leverage the plan to its fullest extent whether that be considering the tax implications of pre-tax vs Roth contributions, maximizing the match, or having a sound investment profile. Luckily, as a plan sponsor, there are certain features within the plan’s design that are at your disposal that may encourage participant engagement, the most powerful of which may be automatic enrollment.
Now being implemented in nearly 62% of retirement plans nationwide, automatic enrollment enrolls a newly hired employee upon becoming eligible to participate. A recent study by Vanguard showed that inertia is a powerful force—roughly 92% of participants who were automatically enrolled continued to participate in their retirement plan after three years12 (see Figure 4 above). Automatic enrollment has become such a powerful tool that lawmakers are considering requiring newly created retirement plans to have an automatic enrollment provision13. If you are struggling to increase participation or think automatic enrollment could be a right fit for your population, consult your advisor at Forest Capital Management.
Footnotes
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