As the number of U.S. retirees increases by 1.2 million a year, the resulting population shift will have a dramatic effect on consumption patterns, according to a report from The Conference Board. The report, “The Impact of Demographic Trends on Consumer Spending,” examines how spending patterns will change as people age, and provides perspective on how population-growth trends are likely to impact spending, Investment News reported. While the U.S. population will grow 8% between 2015 and 2025, the number of people ages 70-84 will spike by 50%. This is driven by the size of the Baby Boomer generation and increases to life expectancy for the elderly. This aging effect will have direct implications for consumer spending. The Conference Board projects the health care sector will see 15% growth, compared to 8% for consumption spending overall, and notes categories that are especially concentrated among the older population, such as long-term care, are likely to experience even more dramatic growth of about 20% – 25%. The reports forecasts that categories that will benefit from increased spending by retirees include household maintenance, gardening, reading, pets, personal care products and travel, while men’s clothing, food away from home, housing rental and used cars will see a decline in spending. There is also a geographic impact. Population shifts will boost consumption in Florida, Texas, Arizona and Nevada by more than twice the national average. Some retirement destinations will likely see more than 30% consumption growth, while other states will see little impact or a decline in consumption.
Establishing eligibility requirements for plan participation requires consideration of both the broad range of available options and the potential effects that different sets of eligibility requirements may have on hiring, retention, and administrative costs. Following is a brief overview of the applicable rules.
Conditions of Eligibility
Federal law establishes the limits of what conditions may be set on eligibility. Generally, plans may require employees to attain any age up to 21 years old before they may become participants in the plan. Plans may also require up to one year of service before employees may make elective contributions. If a 401(k) plan also provides for other types of employer contributions (such as matching on nonelective contributions), it may require that employees complete up to two years of service before being eligible to receive these contributions. In such cases, however, the employees must be 100 percent vested in the employer contributions.
1,000 Hours-of-Service Rule
Generally, a “year of service” is a 12-month period during which an employee completes the number of hours of service specified in the plan. A plan may not specify more than 1,000 hours for this purpose.
An employee’s first year of service is measured during a 12-consecutive-month “initial eligibility computation period,” which begins on the employee’s “employment commencement date.” For periods after the initial eligibility computation period, the plan must measure service for participation purposes either during the 12-consecutive-month periods that begin on the anniversaries of the employment commencement date or during the plan years that include such anniversaries.
The elapsed-time method is an alternative for retirement plans to define crediting service for eligibility. In this system, a year of service is completed when the employee completes 12 months or 365 days of service, regardless of how much he or she actually worked during that period. This system is easier to administer because it does not require keeping track of actual or equivalent hours of service during distinct 12-month periods.
Instead, the employer monitors the period beginning with the employee’s date of hire through the date the employee meets the eligibility requirements. This method requires only that the employee be employed on both the original hire date and on the last date of the eligibility period established by the plan.
Effect of Service Spanning Rule
The IRS has service spanning rules that apply under the elapsed-time method. Generally, under these rules, the employee is not
penalized for absences of less than 12 consecutive months. For example, assume a company has a one-year elapsed-time eligibility requirement. If an employee is hired on June 15, 2016, leaves the company on August 20, 2016, and then is rehired on February 10, 2017, he or she fulfills the one-year service requirement since the absence was less than one year.
Setting Eligibility Terms
When choosing eligibility requirements, retirement plan sponsors should consider such issues as the number of part-time employees they have, the goals of their 401(k) plans, and how different eligibility requirements might affect administrative costs. For example, if a company has high employee turnover, it may choose longer service requirements to reduce its administrative burdens. For similar reasons, an employer with numerous part-time employees may wish to avoid the elapsed time method. On the other hand, sponsors may want to consider whether raising the eligibility requirements might make hiring top talent more difficult and/or impair their employees’ ability to prepare for retirement.
The plan’s definition of “compensation” is important for many different aspects of plan administration — including elective deferrals, allocations, and discrimination testing. Plan sponsors need to be certain that the definition of compensation is properly applied. Failure to do so could result in an operational failure and possibly affect the plan’s qualified status.
Mistakes may arise because many plan sponsors operate their plan based on a plan summary of the definitions and operational requirements. But as the plan is amended, the compensation definition may change while the plan continues to operate as it had previously. To avoid compensation-related mistakes, the IRS recommends the following:
· Review your plan document for the definition of compensation for each plan purpose.
· Use the statutory definition of compensation when required.
· Ensure that your payroll processor and plan administrator receive accurate compensation data.
· Simplify your plan’s definition of compensation by considering using one definition for all plan purposes.
· Review your plan for errors and use the IRS correction programs to fix them as quickly as possible.
· In addition, your plan may avoid mistakes by properly training the plan personnel who determine compensation to confirm they understand the plan document.
On April 4, 2017, the Department of Labor (“DOL”) published a final rule delaying by 60 days the applicability date of the DOL Fiduciary Rile and related exemptions. The new initial applicability date is June 9, 2017.
This delay may only be temporary, and the expanded definition and principles-based impartial conduct standards may survive the final rule. It will take some time for further regulatory events to unfold. Much will hinge on the DOL’s review of the rulemaking package in light of the Presidential Memorandum of February 3, 2017. BFSG will continue to monitor this rulemaking and will keep our clients apprised of significant developments.
Equity markets rose sharply as investor optimism continued, fueled by strong economic data early in the quarter. Following a 3.8% return during the 4th quarter of 2016, the S&P 500 returned 6.1% during the first quarter of 2017.
Growth-oriented stocks and sectors outperformed after having underperformed in 2016. Many of the stocks and sectors which had led the market following the election of President Trump, stalled or pulled back as the Republican majority failed to repeal and replace the Affordable Care Act, creating uncertainty as to whether President Trump’s tax and infrastructure agenda might meet the same resistance.
Financials underperformed as long-term rates slightly declined. After leading the market in 2016, Energy was down 6.7% as the number of U.S. rigs operating continued to increase and OPEC’s willingness for continued production cuts were called into question.
After a significant rise during 2016, the U.S. Dollar weakened helping international stocks to outperform. The international equity market, measured by the MSCI ACWI ex US index, returned 7.9% during the quarter led by emerging markets with a gain of 11.4%. Europe also outperformed as economic data continued to improve.
During the March 15, 2017 meeting, the Federal Open Market Committee (“FOMC”) increased the federal funds target rate by 0.25%. Recent statements from FOMC members point to more rate increases during the year as well as the potential for an effort to reduce their balance sheet, either through allowing bonds to mature without reinvesting the proceeds, or potentially through the actual sale of bonds. Despite these moves and increasing inflation, the rate on the 10-year Treasury declined 0.05% to finish at 2.40%.
Strong economic data early in the quarter supported the increase in the federal funds target rate in March. Job growth in January and February was above trend and economist expectations – with gains of more than 200,000 in each month. However, the number of jobs added in March was just 98,000, well below economist expectations. The unemployment dropped to 4.5% during the quarter and the labor force participation rate increased to 63.0%. Year-over-year growth in average hourly earnings dropped slightly as a result of sharp gains resulting from minimum wage increases in January of 2016 dropping off of the measured period.
Headline inflation continued to move higher with significant year-over-year growth in energy prices and finished the quarter at 2.4%. Core inflation, which excludes food and energy, finished the quarter at 2.0%. Inflation mirrored equity markets, as it stalled in March as well.
Economists continue to weigh the impact of proposed policies by President Trump. Such policies may include an overhaul of the health care system, a reduction in corporate and individual tax rates, deregulation, and a change in international trade policies.