The Markets January 8, 2021

Economic Recovery Started in 4Q20, Charles Schwab Says

The lingering question is what speed the recovery will take.

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Many people have been wondering what the economic recovery in the United States will look like. But Omar Aguilar, chief investment officer (CIO), passive equity and multi-asset strategy for Charles Schwab Investment Management, said the recovery started in the fourth quarter of last year, as soon as news emerged about coronavirus vaccines.

“The question is: How quickly will the vaccines be administered so that the economy can open up?” Aguilar said at a webinar on Schwab CIOs’ investment outlook for the coming year. “That speed will determine the shape and strength of the recovery. The other main, pressing question is how inflation will play out in a continued low interest rate environment.”

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Aguilar said the U.S. economy will continue to face both headwinds and tailwinds in 2021, with the four largest headwinds being the “contraction of the service sector, the slowdown in consumer spending, continued lockdowns and unemployment.”

Still, Aguilar said, there are still a lot of positives. “The manufacturing sector continues to be very strong, not just in the U.S.,” he said. “The stimulus will provide more liquidity, and accommodating policies from central banks will provide access to the markets. The bigger question is the size of the stimulus and the tax plan of the incoming Biden administration. Those two factors could affect earnings because it is a question of what kind of liquidity they will bring to the markets.”

As to which areas of the market Aguilar expects will perform well this year, he points to “equity market rotation translating to cyclicals, emerging markets and ESG [environmental, social and governance investing], away from large-cap and defensive stocks.”

Brett Wander, CIO, fixed income at  Charles Schwab Investment Management, said that while there are continued challenges for fixed income, notably low interest rates and inflation uncertainty, he believes there still is a place for fixed income in portfolios in 2021.

“Ten-year Treasury yields are now at 110, 115 basis points [bps], up from 80 basis points last year,” Wander said. “Democrats taking over both houses of Congress, as well as the presidency, will lead to more stimulative economic policies. We will also be keeping our eye on the vaccine and the prospects for its fast dissemination.”

As to whether Treasury yields will break from the narrow range in which they were trading last year, Wander said, “maybe, but only a little bit. The Federal Reserve is probably comfortable with where yields are now as we only expect a slight increase in inflation, to hover at around 2%. Thus, the real yield on Treasuries will be negative 1%. That is lower than where they normally would be, yet we expect the Fed to keep rates very low, at least for a couple of years.”

Wander advises that investors move only modestly into corporate bonds.

Bill McMahon, CIO, active equity strategies at Charles Schwab Investment Management, said investors looking to generate income should move into “dividend-paying sectors of the market. This year, we think they will return to basics. Look for companies with strong and growing dividends. While 2020 favored companies that benefited from lockdowns, the time is now to look to cyclical companies that will benefit from a return to normalcy.”

McMahon added: “Individual stock selection will be more important this year than last.”

Three sectors he expects will perform well in 2021 are energy, financials and technology. “There will be some opportunities in these three areas as the year unfolds, but investors need to be particular,” McMahon said. “Don’t take a broad-brush approach.”

Compliance January 8, 2021

$30 Million Settlement Reached in Lawsuit Over DB Plan Funding

The case concerns the St. Joseph Health Services of Rhode Island Retirement Plan, which the lawsuit says failed to be a 'church plan' under ERISA.

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A settlement has been reached in litigation claiming that the St. Joseph Health Services of Rhode Island Retirement Plan had not been adequately funded.

Plaintiff Stephen Del Soto, in his capacity as receiver for and administrator of the plan, appointed by the Rhode Island Superior Court, filed the lawsuit on behalf of the plan and its participants. He alleged that, at some point, the retirement plan failed to be a “church plan” as defined by the Employee Retirement Income Security Act (ERISA), and entities administering or associated with the plan hid this to keep from adhering to ERISA funding rules.

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Under the terms of the settlement agreement, $30 million will be paid to the plan by the hospital’s parent company, Prospect Chartercare, and other defendants. The lawsuit says “the settling parties recognize that the claims released herein are disputed and uncertain,” and it notes that it was reached amid a “desire to settle such claims so as to avoid the cost, risk and uncertainty of litigation, and acknowledge that no party is admitting any fault or liability in entering into this settlement agreement.”

Prospect Chartercare is a limited liability company (LLC), which directly and through its 100%-owned subsidiaries owns and operates health care facilities in Rhode Island, including but not limited to two hospitals, Roger Williams Hospital and Our Lady of Fatima Hospital, having acquired them with an asset sale that closed on June 20, 2014.

Also named are Prospect Medical Holdings Inc., a corporation organized and existing under the laws of the state of Delaware; St. Joseph Health Services of Rhode Island (SJHSRI), which prior to the 2014 asset sale owned Fatima Hospital; and Roger Williams Hospital (RWH), the survivor of a merger in 2010 with Roger Williams Medical Center, sometimes doing business under that name. There are a number of other named defendants in the suit.

According to the lawsuit, since the 2014 asset sale, SJHSRI no longer operates a hospital or otherwise provides health care. Instead, SJHSRI’s business consists of defending lawsuits and workers’ compensation claims, collecting certain debts and receivables, paying or settling certain liabilities which were excluded from the 2014 asset sale, and, until the receiver was appointed, administering the plan. The same is true of the business of RWH.

The case concerns an insolvent defined benefit (DB) retirement plan, the St. Joseph Health Services of Rhode Island Retirement Plan, with more than 2,700 participants. The participants learned in August 2017 that the plan had not been adequately funded. The disclosure occurred when the plan was placed into receivership by SJHSRI, with the request that the Rhode Island Superior Court approve a virtually immediate 40% across-the-board reduction in benefits.

The lawsuit inspired legislation in Rhode Island. In June 2018, Governor Gina M. Raimondo signed legislation aimed at helping members of the St. Joseph’s Health Services pension plan reach settlements in their multiple class action lawsuits. The legislation helps protect defendants who settle lawsuits from claims from co-defendants.

In addition, Rhode Island General Treasurer Seth Magaziner joined retired members of the St. Joseph Health Services of Rhode Island pension plan to propose new transparency requirements for pension plans managed by religious organizations.

In a statement about the settlement agreement, Magaziner said, “I’m pleased to hear the positive news that Chartercare and other defendants have agreed to help make St. Joseph’s Hospital and Fatima Hospital retirees whole again after mismanagement allowed their retirement system to become underfunded. While we are still reviewing the specifics of this settlement agreement, this is positive news for these workers. All Rhode Islanders deserve retirement security, particularly health care retirees who have spent their careers caring for others.”

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