Fire Evacuation – Anaheim Hills

Please be advised that, as of 11:30AM on October 9 2017, the Anaheim Hills office is under mandatory evacuation due to a fast-moving brush fire in the area. The staff has been sent to work in remote offices and does have access to email. Please call the Irvine office with any needs and/or questions – (949) 955-2552.

Jobs in America

Interesting article on Yahoo Finance speaking to a disconnect between employee expectations and job openings. “It’s never been harder to fill a job in America”



Markets in Review

Investor optimism pushed domestic equity markets higher during the 4th quarter, while increasing domestic bond yields and a strengthening U.S. dollar led to losses in the bond and international equity markets. The Federal Reserve raised the federal funds rate by 0.25% to a range of 0.50% – 0.75%.

The S&P 500 index ended the quarter up 3.8%, with traditional value-oriented sectors outperforming growth-oriented sectors. Financials led the S&P 500 higher with a gain of more than 21%, due to rising interest rates and the prospect of deregulation under the new presidential administration.

A strengthening U.S. dollar contributed to weakness in international market returns. The international equity market, measured by the MSCI ACWI ex US index, was lower by -1.3%, and emerging markets measured by the MSCI EM index, was lower by -4.2%.

The yield on the 10-year U.S. Treasury rose 0.85%, ending at 2.45%. Increased inflation expectations and further hikes by the Federal Reserve contributed to the rise in rates during the quarter. Prospects of fiscal stimulus, protectionism, and America-first policies by the new administration contributed to the increased inflation expectations.

The Federal Reserve hiked the federal funds rate to a range of 0.50% – 0.75% during the quarter and signaled for multiple additional hikes in 2017. The unemployment rate decreased from 5.0% to 4.7% during the quarter, due to continued job growth and a relatively unchanged labor force participation rate.

Headline inflation, which measures total inflation within an economy, including commodities such as food and energy, increased during the quarter to an annual rate of 1.7%.  Core inflation, which excludes food and energy, also slightly decreased to an annual rate of 2.1%. A sharp year-over-year increase in energy prices, including a 2.7% jump in gasoline, contributed to the increase in headline inflation.

401(k) Contributions Increasing

American workers on average invested 6.8% of salaries in 401(k) or profit-sharing plans in 2015, up from 6.2% in 2014, according to the Plan Sponsor Council of America (PSCA). “An increase in retirement savings of 0.6 percentage points might not sound like much, but it represents a 10% rise in the amount flowing into those plans over just five years, or billions of dollars. About $7 trillion is already invested in 401(k) and other defined contribution plans, according to the Investment Company Institute,” Bloomberg News reported. While workers are saving more, companies have held their financial contributions steady. Employers contributed 4.7% of payroll in 2015, the same as in the prior two years. Automatic enrollment is likely a big factor in the increased investment. Almost 58% of plans surveyed make their sign-up process automatic, requiring employees to take action only if they do not want to participate. In plans where employees need to opt-out, 89% of workers contribute to 401(k)s, while 75% make contributions under plans without auto-enrollment. Auto-enrolled employees also save more on average, saving 7.2% of their salaries versus 6.3% for those who were not auto-enrolled. The PSCA found that less than a quarter of plans auto-escalate all participants, and 16% of plans boost contributions only for workers who are deemed to be not saving enough.

Review Plan-related Insurance Protection

It’s not unusual to see litigation against retirement plans in the news. Sponsors of 401(k) and other defined contribution retirement plans should evaluate their fidelity bonds and fiduciary liability policies to make sure they have adequate protection.

Pension law (ERISA) generally requires that every fiduciary of an employee benefit plan and any other person who “handles funds or other property” of the plan be covered by a fidelity bond unless exempted under the law. This requirement protects a retirement plan against losses due to fraud or dishonesty (e.g., larceny, theft, embezzlement, or forgery). In contrast, fiduciary liability insurance — which is not required by ERISA — more broadly protects the plan (and typically the fiduciaries) against claims for losses resulting from the act or omission of a fiduciary.

Who Requires Fidelity Bonding?

A person “handles” funds or other property of a plan whenever his or her duties or activities might cause a loss of plan funds due to fraud or dishonesty. The general criteria for determining “handling” include:

  • Physical contact with cash, checks, or similar property
  • Ability to transfer funds from the plan
  • Ability to negotiate plan property
  • Authority to direct disbursements
  • Authority to sign checks
  • Supervisory responsibility for activities that require bonding

“Funds or other property” generally refers to all funds or property that the plan uses or may use to pay benefits to participants and or beneficiaries, including investments such as land and buildings, mortgages, and stock in closely held corporations.

Service providers may have to be bonded if they have access to plan funds or other property or have decision-making authority that can give rise to a risk of loss through fraud or dishonesty.

Parties to Fidelity Bonds

Usually, the insurer provides the bond and the plan is named as the insured party. The parties covered by the bond are those handling funds or other property of the plan. If a plan official causes a covered loss to the plan due to fraud or dishonesty, the plan can make a claim on the bond.

Bonding Coverage Requirements

Fidelity bonds must be purchased from a surety or reinsurer named on the Department of the Treasury’s Listing of Approved Sureties. Each person generally must be bonded in an amount equal to at least 10% of the plan assets handled during the plan’s previous year. The minimum required bond amount is $1,000, and there is a maximum requirement, generally, of $500,000. For officials of plans that hold employer securities, the maximum required bond amount is $1,000,000. Fiduciaries should review the adequacy of bonding amounts at the beginning of each plan year as plan asset totals change. Since the purpose of fidelity bonding is to protect the plan, plan assets may be used to pay for the bond.

Fiduciary Liability Insurance

Because plan liability may arise out of not only acts of fraud or dishonesty but also out of breaches of the many complex fiduciary duties involved in administering a plan, many plans maintain fiduciary liability insurance. These policies protect the plan and typically any fiduciaries against losses resulting from acts or omissions — particularly, for failures to observe the many complex statutes, regulations, court rulings, and other guidance that define a fiduciary’s obligations to the plan.

Other Aspects of Fiduciary Liability Coverage

Fiduciary liability insurance typically protects a wide range of plan fiduciaries, including administrators, trustees, committees, and the plan sponsor. Coverage of fiduciaries often includes past, present, and future trustees and all plan and trust fund employees who are fiduciaries.

Fiduciary liability insurance may also provide protection for situations when a fiduciary knew of a breach by a co-fiduciary and failed to remedy the breach. A plan may also maintain fiduciary liability insurance to protect itself from losses caused by a fiduciary’s involvement in a prohibited transaction, but it may not contain a provision relieving a fiduciary of liability in that situation.

When selecting the amount of fiduciary liability insurance protection for the plan, a fiduciary must purchase the most suitable coverage at a cost of plan assets no greater than necessary. To meet ERISA’s requirements, the insurance company should have a satisfactory rating from a reputable rating agency.

The plan can purchase fiduciary liability insurance for its fiduciaries or itself if the policy allows recourse by the insurer against the fiduciary where the loss was caused by a breach of a fiduciary obligation by the fiduciary. Alternatively, a fiduciary can purchase insurance (or an employer can purchase insurance for the fiduciary) to cover his or her liability from a breach of fiduciary duties. Where the employer purchases such a policy, there is no need for the policy to provide for recourse against the fiduciary.