The Markets July 20, 2021

Natixis Studies Investment Outlooks for 2021

Investment experts said changes in supply and labor, rising wages and housing prices are key trends to keep watching, along with ESG investing and cryptocurrency.

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A Natixis Investment Managers webinar examined what’s been happening in the investment market over the past year and trends to watch ahead of 2022. The investment experts at the 2021 “Natixis Strategist Midyear Market Outlook” also detailed their expectations for investors as the globe prepares to head into a recovery phase post-pandemic.

Esty Dwek, head of global market strategy for the dynamic solutions team at Natixis, began the panel by observing that the U.S. has had a slow path to recovery, given new coronavirus variants and the initial gradual rollout of the vaccine in the first half of 2021. As the Delta variant becomes more widespread and COVID-19 infection rates rise among Americans, Dwek said she does not foresee an immediate recovery in the short-term. “We knew it wasn’t going to be a smooth, straight-line recovery and these past few weeks have shown this to us,” she said.

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Lynda Schweitzer, vice president and portfolio manager at Loomis, Sayles & Co., pointed to changes in supply and labor as a disruption to the economy. As more people are hesitant to return to work, companies are promoting jobs by raising wages. Dwek said she does not anticipate a return to normal wages as a result.

“We know that some people are not so keen to come back to the labor market,” Dwek noted. “Does that mean that wages will go back? I don’t think so, but it is something we will need to watch.”

Schweitzer agreed, adding, “We weren’t expecting the U.S. to slow in growth, but we were expecting the rest of the world to catch up on the vaccination front. It will probably take longer to play out. Delta variants and supply chain disruptions prolong this growth.”

Schweitzer also said high housing prices and wages are two key pieces to watch in the market. Among with supply and labor chains, a surge in demand for housing and rising wages are contributing to increased inflation, she said. 

The panelists also identified emerging market trends throughout 2020 and into 2021, saying environmental, social and governance (ESG) investing and cryptocurrency are continuing to be major points of interest for the market. According to Natixis’s Strategist Midyear Outlook Survey, almost half of participant say ESG strategies have become mainstream, and 26% say an ESG strategy is a must-have investment.

Dwek said ESG investing options are no longer niche and now permeate across asset classes and conversations with clients across the globe. “Asia is catching up quickly, while the U.S. is slowly catching up. In Europe, regulation is making this a must-have and is leading investors into this direction,” she said.

“ESG is just going to become one of the initial parts of the conversation with investors across asset allocation in the coming years,” Dwek continued.

Clients are also inquiring about ESG outcomes, not just sustainable reporting, Schweitzer said. “They want outcomes and engagement and to show that we are being participatory on ESG issues,” she explained. “It will continue to evolve and become an essential part of any investment process.”

While 17% of respondents in the survey believed cryptocurrency to be a fad and 12% said it’s a “disaster waiting to happen,” Dwek said she believes digital assets will succeed without removing power from central banks or countries; however, she admitted that there’s still some uncertainty regarding crypto’s risks.

“I do have some degree of skepticism as well. I do think the risks are underappreciated,” she said. “But I do think it’s here to stay.”

Compliance July 20, 2021

IRS Updates Employee Plans Compliance Resolution System

The agency has added two correction methods for overpayments by DB plans and expand the ability to correct an operational failure by plan amendment, among other things.

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The IRS has issued Revenue Procedure (Rev. Proc.) 2021-30, updating its comprehensive system of correction programs for sponsors of retirement plans.

The Employee Plans Compliance Resolution System (EPCRS) permits plan sponsors to correct plan and operational failures to continue to provide their employees with retirement benefits on a tax-favored basis. The components of EPCRS are the Self Correction Program (SCP), the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP).

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In summary, the new Revenue Procedure updates Rev. Proc. 2019-19 primarily to:

  • expand guidance on the recoupment of overpayments of defined benefit (DB) plan benefits;
  • eliminate the anonymous submission procedure under VCP, effective January 1, 2022;
  • add an anonymous, no-fee, VCP pre-submission conference procedure, effective January 1, 2022;
  • extend the end of the SCP correction period for significant failures by one year (which has the result of also extending the safe harbor correction method for employee elective deferral failures lasting more than three months but not beyond the extended SCP correction period for significant failures);
  • expand the ability of a plan sponsor to correct an operational failure under SCP by plan amendment; and
  • extend by three years the sunset of the safe harbor correction method available for certain employee elective deferral failures associated with missed elective deferrals for eligible employees who are subject to an automatic contribution feature in a 401(k) plan or 403(b) plan from December 31, 2020, to December 31, 2023.

Correction of Overpayments by DB Plans

The IRS says previous Revenue Procedures clarified the permissible methods for correcting overpayments under EPCRS by noting that, depending on the facts and circumstances, the correction may not need to include requesting that plan participants and beneficiaries return overpayments to the plan. The agency says that based on comments it received from stakeholders, it is further clarifying and expanding options available for the recoupment of overpayments.

Previous guidance is revised to provide that plan sponsors may offer overpayment recipients the option of repaying it in a single sum payment, through an installment agreement or through an adjustment in future payments.

There are also two new overpayment correction methods: the funding exception correction method and the contribution credit correction method. “These methods reduce the need for defined benefit plans to seek recoupment from overpayment recipients and ease the process for overpayment recipients repaying overpayments, while balancing the interest of other participants in the plan,” the IRS says.

Funding exception correction method. This method provides that corrective payments are not required for a plan subject to Internal Revenue Code (IRC) Section 436 funding-based limitations, provided that the plan’s certified or presumed adjusted funding target attainment percentage (AFTAP) that is applicable to the plan at the date of correction is equal to at least 100% (or, in the case of a multiemployer plan, the plan’s most recent annual funding certification indicates that the plan is not in critical, critical and declining, or endangered status, determined at the date of correction). Future benefit payments to an overpayment recipient must be reduced to the correct benefit payment amount.

For purposes of EPCRS, no further corrective payments from any party are required; no further reductions to future benefit payments to an overpayment recipient, or any spouse or beneficiary of the recipient, are permitted; and no further corrective payments from an overpayment recipient, or any spouse or beneficiary of a recipient, are permitted.

Contribution credit correction method. This method provides that the amount of overpayments required to be repaid to the plan is the amount of the overpayments reduced by:

  • the cumulative increase in the plan’s minimum funding requirements attributable to the overpayments (including the increase attributable to the overstatement of liabilities, whether funded through cash contributions or through the use of a funding standard carryover balance, prefunding balance or funding standard account credit balance), beginning with the plan year for which the overpayments are taken into account for funding purposes through the end of the plan year preceding the plan year for which the corrected benefit payment amount is taken into account for funding purposes; and
  • certain additional contributions in excess of minimum funding requirements paid to the plan after the first of the overpayments was made.

This reduction is referred to as a “contribution credit.” Future benefit payments to an overpayment recipient must be reduced to the correct benefit payment amount.

For purposes of EPCRS, if the amount of the overpayments is reduced to zero after the contribution credit is applied, no further corrective payments from any party are required; no further reductions to future benefit payments to an overpayment recipient, or any spouse or beneficiary of the recipient, are permitted; and no further corrective payments from an overpayment recipient, or any spouse or beneficiary of the recipient, are permitted.

However, if a net overpayment remains after the application of the contribution credit, the plan sponsor or another party must take further action to reimburse the plan for the remainder of the overpayment.

Explanations of Other Modifications

The new Revenue Procedure eliminate the condition that requires a plan amendment that increases a benefit, right or feature to apply to all participants eligible to participate under the plan.

It also increases from $100 to $250 the threshold for certain inconsequential amounts for which a plan sponsor is not required to implement correction.

The Revenue Procedure extends the end of the SCP correction period for significant failures from the last day of the second plan year following the plan year for which the failure occurred to the last day of the third plan year following the plan year for which the failure occurred.

Effective January 1, 2022, plan sponsors can request a no-fee, anonymous, VCP pre-submission conference under specified circumstances. Also beginning January 1, 2022, Audit CAP sanctions are required to be submitted through the Pay.gov website instead of by certified check or cashier’s check.

The IRS has extended by three years (from December 31, 2020, to December 31, 2023) the sunset of the safe harbor correction method available for certain employee elective deferral failures associated with missed elective deferrals for eligible employees who are subject to an automatic contribution feature in a 401(k) or 403(b) plan.

The Revenue Procedure also identified which plans are eligible for certain correction programs and the effects of examinations. If the plan or plan sponsor is under examination, VCP is not available. The regulation also identifies when SCP is available to a plan that is under examination.

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