Investing December 16, 2015

Fed Hike: Little Impact on Plan Sponsors for Now

The Federal Reserve raised interest rates by one-quarter of a percent, the first raise in nine years.
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For the first time since 2006, the Federal Reserve has raised interest rates at its quarterly meeting, after much anticipation and nail-biting. But not everyone is particularly moved by the quarter-percentage point increase, and this move—likely the first in a series of gradual raises—won’t make much difference to most investors, sources say.

The question of what this rate rise means for retirement plan sponsors elicits an amused response from Bob Doll, chief equity strategist at Nuveen Asset Management. “Nothing!” he tells PLANSPONSOR. “We went from zero to 25 basis points. It’s a nonevent.”

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Doll believes this small increase is nothing to be concerned about, and might even yield some positive effects. “A few more quarter-point moves, and retirees that have money in short-term dated stuff are going to get more than zero,” he points out, “which will be a pleasant change for some. People got used to rolling their CDS over the last several decades, and now they will get a little bit of return.”

Recent research showed the extended zero-rate period to be a drag on retiree nest eggs. 

The action is not one and done, Doll points out. “What it means is that rates are slowly going to go up,” he says. “I don’t think rates are going to get high, but it tells us that the era of free money and high returns is in the rearview mirror. For plan sponsors, the return profile is not as good as it was the last five years.”

NEXT: Size does matter

If Doll doesn’t seem too excited, he says it’s because the move was so well telegraphed and so overdue. “We have collectively—the investment community and those who cover it—made such a mountain out of a molehill,” he says. “It’s not like they’re going from 2-1/2% and we’re in debates at some point in time, discussing what is the rate increase that will be that straw that breaks the camel’s back.”

The Federal Open Market Committee (FOMC) in a statement Wednesday afternoon noted that the year’s “considerable improvement in labor market conditions” as one of the deciding factors. “[The Committee] is reasonably confident that inflation will rise, over the medium term, to its 2% objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to ¼% to ½%. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2% inflation.”

“I wish I could give more sturm und drang,” Doll says, “but whose life really changes [from a rate increase of this size]?”

Compliance December 16, 2015

IRS Releases 2015 Cumulative List

The list of changes in plan qualification requirements is used by retirement plan sponsors and practitioners submitting determination letter applications for their plan documents.
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The Internal Revenue Service (IRS) issued Notice 2015-84, containing the 2015 Cumulative List of Changes in Plan Qualification Requirements (2015 Cumulative List) described in section 4 of Rev. Proc. 2007-44. 

The 2015 Cumulative List is to be used by plan sponsors and practitioners submitting determination letter applications for plan documents during the period beginning February 1, 2016, and ending January 31, 2017. Plans using this Cumulative List will primarily be single employer individually designed defined contribution plans and single employer individually designed defined benefit plans that are in Cycle A. Generally, an individually designed plan is in Cycle A if the last digit of the employer identification number of the plan sponsor is 1 or 6.                        

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In the Notice, the IRS says the 2015 Cumulative List reflects law changes under the Pension Protection Act of 2006 (PPA); the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA); the Small Business Jobs Act of 2010 (SBJA); the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA 2010); the Moving Ahead for Progress in the 21st Century Act (MAP-21); the American Taxpayer Relief Act of 2012 (ATRA); the Highway and Transportation Funding Act of 2014 (HATFA); the Cooperative and Small Employer Charity Pension Flexibility Act (CSEC Act); the Consolidated and Further Continuing Appropriations Act, 2015; and the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.

Except as otherwise provided, the IRS will not consider in its review any:

  • guidance issued after October 1, 2015; 
  • statutes enacted after October 1, 2015;
  • qualification requirements first effective in 2017 or later;
  • statutory provisions that are first effective in 2016, for which there is no guidance identified in its notice; or
  • proposed regulations or other guidance described solely in any footnote in the notice.

In January, the IRS proposed that effective January 1, 2017, the scope of the determination letter program for individually designed plans will be limited to initial plan qualification and qualification upon plan termination.

Text of Notice 2015-84 is here.

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