Volatility Persists in Equity Markets

Equity markets looked poised to finish the week on a positive note following a press conference from Fed Chair Janet Yellen on Thursday afternoon, where she stated that the central bank is still on course to raise interest rates in 2015. Yellen stated that, “most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgements about appropriate monetary policy will change.”

This press conference came a week after the Federal Open Market Committee left its benchmark federal funds rate target near zero, saying “recent global economic and financial developments” might dampen growth and inflation in the U.S. Of course, the recent global economic development Yellen was referencing is the concerns about China’s growth in the near term.

The S&P 500 eventually erased the early rally and the index finished the week down for its second consecutive week.

Yellen’s comments were followed by more encouraging macroeconomic news in the U.S. as the Commerce Department reported revisions for Q2 GDP that came in higher than expected at a 3.9% seasonally adjusted annualized rate, up from the previous revision of 3.7%. The agency first pegged growth in the 2nd quarter at 2.3% in July.

Recent data on consumer purchases of services helped push up the second quarter reading. The data showed personal consumption grew at a 3.6% pace, up from the previously estimated 3.1%.

The GDP figures also reflect positive developments in the construction industry. Residential constructions grew at a revised pace of 9.3% in the second quarter. Nonresidential construction grew at a 6.2% pace, which is a sharp increase over the previous estimate of 3.1%. These upward revisions suggest that the overall U.S. economy is on track for a solid year.

We expect financial markets will remain volatile over the next few weeks as investors eagerly wait for 3rd quarter earnings reports. Corporate earnings and CEO guidance are a great barometer for the global growth outlook. The unofficial start of earnings season will be on 10/8/2015 when Alcoa Inc. reports 3rd quarter earnings.

Deadline to Establish SIMPLE IRA Plans Approaching

Small business owners (defined as those with 100 or fewer employees) have multiple options to choose from in regards to setting up a retirement plan for their business. One of which is the SIMPLE IRA plan that allows employees to make elective contributions from their salary of up to $12,500 for 2015. Those over the age of 50 are allowed to make catch-up contributions of $3,000 as well in 2015. The employer provides a matching contribution that is based on either a set percentage of salary for all employees whether they make elective contributions or not, or by matching employee contributions. The non-elective employer contribution election is 2% of salary towards all employees regardless if they make contributions. The dollar-for-dollar match can be up to 3 percent of compensation for those that participate in making contributions. This election can be made by the employer on an annual basis.

The deadline to establish this type of plan for 2015 is October 1st.

401(k) Loans

By taking a loan from your 401(k) account you are borrowing a portion of the money you have saved for retirement and paying interest to yourself with after-tax dollars. Not every plan allows for this type of feature but for those that do it is important to understand the rules of how they work as well as the pros and cons. The maximum one can borrow is the lesser of: A. 50% of the market value of the account or B. $50,000. There are also rules on how many times someone can borrow from their 401(k) plan within a 12 month period.

The amount that is paid back to the 401(k) for the interest on the loan is considered taxable upon distribution later (thus taxed twice) and unlike home mortgage interest, this interest is not tax deductible. The interest rate is determined based on the prime rate plus up to a couple percentage points.

The few benefits of this type of loan are that there is no credit check, no major application forms, and funds are easily available. The amortization schedule automatically determines the payback amount to deduct from each paycheck going forward. Some plans offer a longer period of time for payback if the loan is used for the purchase of a home, whereas general loans may be due over a period of 5 years. Early payoff of these loans generally requires a lump sum payment.

Since you are borrowing money from yourself you actually reduce the level of funds that are invested in the 401(k) account. The investments in the account are generally reduced proportionately based on amount that is borrowed, or you may be able to elect which specific funds or asset classes to liquidate for the loan amount. Therefore you lose the possible compound growth within the account on the amount of the borrowed funds. If you have an outstanding loan when your employment ends you are required to pay the loan back within a short time period (typically 60- 90 days) or else the loan is deemed distributed and considered taxable income to you. If you are not at least 59 ½ years old there is a 10% penalty on top of the taxes due on this amount. One attribute often seen with 401(k) loans is the desire by the individual to keep their paycheck amount the same. Therefore because they are now paying off part of the loan each paycheck, they reduce their 401(k) contributions accordingly to receive the same net amount as before the loan. So not only is there less investment in the 401(k) account, but they are also now saving less for retirement!

The ease of acquiring a 401(k) loan might make this an attractive option, but these loans can potentially wreak havoc on a retirement plan. Before taking a loan from your retirement savings make sure to consider all other options first as well as fully understand the rules laid out in the 401(k) summary plan document. Most individuals are under saving for retirement to begin with, so tapping their 401(k) should be considered one of the last options available.


This publication is provided as a service to our clients and associates of PFA solely for their own use and information. The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified. The content in this publication is for general information only and not intended to serve as individual investment advice. You should seek independent advice from a professional based on your individual circumstances.