Unit 4 - Corporate Sponsored Retirement Plans

An employer has a qualified retirement plan that promises to pay employees a specific percentage of their average salary if they complete 20 years of service. This type of pension plan is a: A) defined benefit pension plan. B) defined contribution pension plan. C) profit-sharing plan. D) 401(k) plan.

Answer: A A defined benefit pension plan is one that promises to pay employees a certain specified benefit at retirement. The modern trend is toward a defined contribution plan, in which the employer promises to make certain contributions to the plan each year, but does not commit to paying employees a specific benefit when they retire. A profit-sharing plan is a type of defined contribution pension plan.

Why are ERISA Section 404(c) and the accompanying Department of Labor Regulations important for an employer sponsoring a Section 401(k) retirement plan and who offer at least three diversified categories of investments with materially different risk and return characteristics? A) If followed, the employer is relieved of fiduciary liability for any unsatisfactory investment results experienced by the employee. B) This Section permits the employer to avoid certain coverage and participation rules that would otherwise apply to a qualified plan. C) Union-negotiated contracts are exempt from Department of Labor review under this safe harbor section. D) If followed, the employer need not provide a Summary Plan Description (SPD) to any employees participating in the plan.

Answer: A The importance of ERISA Section 404(c) to an employer sponsoring a Section 401(k) plan with self-directed investment or earmarking provisions is the relief from fiduciary responsibility for unsatisfactory investment results experienced by the employee.

Those individuals who are considered parties in interest due to handling the assets of a corporate retirement plans are: A) not considered to have a fiduciary responsibility. B) not permitted to use those funds to acquire company assets in an amount beyond the allowable limits. C) able to sell personal securities to the plan if that will benefit plan participants. D) encouraged to use plan funds to assist the employer when there is a cash flow crisis.

Answer: B ERISA does permit an employee benefit plan to acquire certain company assets subject to statutory limits.

GEMCO Manufacturing Co. has appointed the company's CFO as the trustee for their employee retirement plan. You are an IAR and you advise a substantial portion of the plan's assets. You are contacted by the CFO requesting a short-term loan from the plan assets for which he will pay the plan prime + 2%. Your best course of action would be to: A) refuse to allow this to happen because the plan assets will suffer. B) refuse to allow this to happen as it would be a violation of your fiduciary responsibility. C) permit the loan because the CFO is the plan trustee. D) permit the loan once you have been satisfied that there is adequate collateralization in place.

Answer: B ERISA never permits transactions of this type for a plan trustee. As an IAR handling some of the plan's investments, you would be placed in a fiduciary position and could not violate that trust.

Where would you be most likely to find an IPS? A) SPD B) Defined benefit plan C) IRA D) GRAT

Answer: B The investment policy statement (IPS), although not required under Department of Labor (DOL) rules, is generally found in corporate qualified plans, such as the defined benefit or defined contribution plan. Because the investor manages the IRA, there is no need to prepare an IPS for participants to review.

On retirement, if your customer who is a corporate executive will receive retirement income equaling a percentage of the average of his last 5 years of compensation, this is which type of plan? A) Keogh B) Defined contribution C) TSA D) Defined benefit

Answer: D In a defined benefit plan, the retiree receives a specified amount with the sponsor bearing the investment risk. Keogh plans are not corporate plans. In a defined contribution plan, the employee contributes a defined amount each period, bears the investment risk, and does not receive a defined amount upon retirement. TSAs (tax-sheltered annuity plans, a common name for 403(b) plans) are defined contribution plans, not defined benefit plans.

Paul Rogers is a participant in his employer's Section 401(k) retirement plan, having made both salary reductions as well as receiving employer matching contributions to his account over the past year. In the current year, Paul incurs a family medical emergency, causing him to take a hardship distribution from the plan. After taking this distribution, Paul comes into some found money and, instead, rolls over the amount of the hardship distribution into his traditional IRA. What is the taxable consequence, if any, of this distribution and rollover transaction? A) The distribution is taxable in full as ordinary income since it is not eligible for rollover treatment. B) The portion of the distribution representing Paul's salary reduction contributions is tax free. C) The distribution is taxable but is eligible for a tax credit since it is made from a qualified plan. D) So long as it is treated as a loan under plan provisions, the distribution will be treated as tax free.

Answer: A A hardship distribution made from a Section 401(k) plan (or any other type of qualified plan) is not an eligible rollover distribution under law and is therefore taxable in full as ordinary income.

Which of the following concerning a money purchase pension plan are TRUE? All employees must contribute to the plan. Voluntary employee contributions are optional. Employer contributions are required. Employer contributions are optional. A) II and III. B) I and III. C) I and IV. D) II and IV.

Answer: A A money purchase pension plan is a defined contribution plan established by the employer, thereby making the contributions mandatory. Employee participation by making voluntary contributions to the plan is optional. Employees who contribute to the plan usually contribute a percentage of their income.

Which of the following is (are) TRUE regarding qualified pension plans? They must not discriminate. They must have a vesting schedule. They must be in writing. Every month the employer must update the current status of all accounts. A) I, II and III. B) I and III. C) III only. D) I, II, III and IV.

Answer: A An employer must update the status of all employees at least annually, not monthly.

In a qualified plan, if the employer makes all of the contributions, the employee's cost basis is: A) zero. B) the value of the contributions. C) the increase in value only. D) one-half of the contributions made.

Answer: A Because the employee has not made any contributions, the cost basis is zero. In any qualified plan, if all of the contributions are in pretax dollars, the cost basis is zero no matter who contributes the money.

ERISA regulation does not apply to: public school district retirement plans. publicly traded utility company retirement plans. federal government employee retirement plans. A) I and III only. B) I only. C) I and II only. D) I, II and III.

Answer: A ERISA rules only apply to private sector plans. Government or public sector plans are not subject to the Employees Retirement Income Security Act of 1974.

Employee contributions to a 401(k) plan are subject to: Social Security taxes. federal unemployment taxes. federal income tax withholding. state income tax withholding. A) I and II. B) I and III. C) III and IV. D) II and IV.

Answer: A Employee contributions are excluded from taxable income at the time of contributions, which exempts them from income tax, but not from payroll taxes.

Which of the following statements are true about both an individual Roth IRA and a Roth 401(k) plan? contributions are made with after-tax dollars. one must have AGI below a certain level in order to maintain either Roth. if all the conditions are met, withdrawals are tax-free. there are no RMDs at age 70½. A) I and III. B) II and IV. C) I and II. D) III and IV.

Answer: A In any Roth plan, contributions are made with after-tax dollars and, assuming all conditions are met, withdrawals are tax-free. However, unlike the individual Roth IRA, there are no earnings restrictions on participants in a Roth 401(k) plan and RMDs must begin at age 70 ½.

Without the need to meet any special conditions, a participant in which of the following retirement plans would be able to withdraw funds prior to age 59½ and not incur a 10% tax penalty? A) 457 B) 401(k) C) 403(b) D) 501(c)(3)

Answer: A The 457 Plan allows participants to withdraw funds at any time, not just after age 59½, without incurring the 10% tax penalty. Income taxes would, of course, be due, but no penalty.

To comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must: offer plan participants at least three different investment alternatives. ensure that plan participants are insulated from control over their portfolios. allow plan participants to change their investment options no less frequently than quarterly. allow plan participants to purchase U.S. Treasury securities. A) I and III. B) I and IV. C) II and III. D) II and IV.

Answer: A The safe harbor requirements relieve the trustee of a 401(k) plan of liability if the plan participants have the ability to select from at least 3 different investments and are allowed to make selection changes no less frequently than quarterly.

Which of the following statements about plan fiduciaries under ERISA are TRUE? Plan fiduciaries sometimes have conflicting obligations to plan participants and other parties in interest. Plan fiduciaries must ordinarily diversify plan investments. Plan fiduciaries are personally liable for fines if they violate their fiduciary duties. A) II and III. B) I and II. C) I and III. D) I, II and III.

Answer: A Under ERISA, plan fiduciaries must act solely in the interests of plan participants and beneficiaries, and they may not place the interests of other interested parties above those of the plan participants and beneficiaries. They must diversify plan investments to minimize the risk of large losses, unless it would not be wise to do so. If they violate any of their fiduciary duties, they may be personally liable for large fines.

As a general rule, loans from a 401(k) plan must be repaid within how many years? A) 20 years. B) 5 years. C) 10 years. D) 15 years.

Answer: B Most loans from a 401(k) plan are required to be repaid within 5 years. This rule does not apply to loans taken for a home purchase.

A 457 plan could cover which of the following? Employees of a corporation. Independent contractors providing services to the county. Employees of a nonincorporated business. City employees. A) II and III. B) II and IV. C) I and III. D) I and IV.

Answer: B The 457 plan is a nonqualified deferred compensation plan for municipal employees as well as for independent contractors performing services for those entities.

Although there is no specific rule requiring it, most qualified plans have an investment policy statement. For those plans that do have an IPS, it would include all of the following information EXCEPT: A) the information in the summary plan document specified by the Department of Labor. B) how the plan measures investment performance. C) the schedule for future needs of the plan. D) investment parameters to be followed by the portfolio managers.

Answer: A Under the rules of the Department of Labor (DOL),one of the most important documents participants are entitled to receive automatically when becoming a participant of an ERISA-covered retirement plan, is a summary of the plan, called the summary plan description or SPD. The plan administrator is legally obligated to provide to participants, free of charge, the SPD. The summary plan description is an important document that tells participants what the plan provides and how it operates. It provides information on when an employee can begin to participate in the plan, how service and benefits are calculated, when benefits become vested, when and in what form benefits are paid, and how to file a claim for benefits. However, it has nothing to do with the investment policies that will be followed by the plan's advisers.

Company-sponsored 401(k) retirement programs have which of the following? Voluntary employee contributions. Voluntary employer contributions. Mandatory employee contributions. Mandatory employer contributions. A) III and IV. B) I and II. C) I and IV. D) II and III.

Answer: B 401(k) plans are salary reduction, employer-sponsored, qualified retirement plans. Employee participation is voluntary and any matching contributions made by the employer are also voluntary.

Which of the following statements about 401(k) plans are CORRECT? 401(k) plans are a type of defined benefit retirement plan. An employee's elective deferrals are made with pre-tax dollars. Earnings on the contributions to a 401(k) accumulate on a tax-deferred basis. A) I, II and III. B) II and III. C) I and II. D) I and III.

Answer: B A 401(k) plan is a type of defined contribution plan rather than a defined benefit plan. A participating employee is not guaranteed a specific retirement benefit from the plan; instead, the retirement benefits depend on how much is contributed to the plan and how much the contributions earn. A 401(k) plan allows employees to make elective deferrals from their pay which results in those funds being contributed on a pre-tax basis. Plan earnings accumulate on a tax-deferred basis. This means that plan participants do not pay income tax on the earnings until they are withdrawn.

Which of the following statements regarding IRAs are CORRECT? One may have both a Roth IRA and a Traditional IRA, contributing the maximum to each one. One may have both a Roth IRA and a Roth 401(k) contributing the maximum to each one. Both traditional IRAs and Roth 401(k) plans have RMDs at age 70 ½. If one is a participant in a Roth 401(k) plan, the earnings limits are waived for opening a Roth IRA. A) III and IV. B) II and III. C) I and IV. D) I and II.

Answer: B A Roth IRA and Roth 401(k) are two separate items and maximum allowable contributions may be made to both. This is unlike the IRAs where one can maintain both, but the total contribution is the annual limit (currently $5,500 with a $1,000 catch-up). One of the things about a Roth 401(k) that is different from the Roth IRA is that RMDs must start at the same time as with traditional IRAs. Although one may participate in a Roth 401(k) without regard to AGI limits, that is not so with the Roth IRA.

If a retiree is paid an annual amount equal to 30% of the average of his last three years' salary, which of the following retirement plans offers this type of payment? A) Money purchase pension B) Defined benefit ​pension C) Deferred compensation D) Profit-sharing

Answer: B A retirement plan that establishes the retiree's payout in advance is a defined benefit plan. ​Profit sharing and money purchase pension plans are defined contribution plans.

An employer-sponsored retirement plan that pays a specific benefit to participants at their normal retirement age is a: A) defined contribution plan. B) defined benefit plan. C) supplemental employee retirement plan. D) section 401(k) plan.

Answer: B A traditional defined benefit plan promises to pay a specific benefit to a participant at his normal retirement age as specified by the plan document.

Which of the following statements regarding participant loans in a 401(k) plan are CORRECT? The maximum allowable loan amount is the lesser of $50,000 or 50% of the participant's vested account balance. Unless the loan is taken out for the purpose of a mortgage on the participant's principal residence, repayment must be completed within 60 months of obtaining the loan. Payback of the loan will be through payroll deduction. Default on the loan will result in the IRS treating the loan as a distribution. A) III and IV. B) I, II, III and IV. C) I and II. D) II and III.

Answer: B All of these statements regarding borrowing from a 401(k) plan are true.

Which of the following statements regarding a qualified profit-sharing plan is TRUE? A) It can permit regular direct cash payouts to participants before retirement. B) It must be established under a trust agreement. C) It must define a specific contribution amount. D) Contributions are required annually.

Answer: B All qualified retirement plans must be established under a trust agreement. Contributions with this type of plan are not required annually, nor can the plan make direct cash payouts to participants before retirement.

Although not required by DOL regulations, if a plan administrator prepared a written investment policy statement meeting ERISA requirements, you would expect to find all of the following EXCEPT: A) investment philosophy. B) the identity of the specific securities to be chosen for the portfolio. C) performance measurement parameters. D) methods to be used for determining how the plan will meet future cash flow needs.

Answer: B Although not required by law, most qualified plans have an IPS. One thing not found in that statement is a listing of specific securities to be selected. The method for determining how they are selected will be there, but not the specific securities.

What is the proper course of action for the fiduciary of a trust that has a portfolio made up of 10% cash and 90% stock of one company that has recently experienced a 40% market gain? A) Use the cash to acquire more shares of the stock B) The fiduciary can maintain the current allocation if ,while acting in the capacity of trustee, he believes it aligns with the goal of the trust C) Increase the cash position to 25% by taking some of the profits off the table D) Begin diversifying the equity portfolio

Answer: B In virtually every trust question, the correct answer will be that the trustee (fiduciary) has to follow the terms of the trust and meet the trust's goals and objectives.

A fiduciary of an ERISA plan is preparing an investment policy statement. Included would probably be specific security selection methods of performance measurement determination for meeting future cash flow needs the summary plan description A) III and IV B) II and III C) I, II, and III D) II and IV

Answer: B The IPS will include methods of performance measurement (if it is meeting objectives) and a way to determine how future cash flow needs will be met (based on expected numbers of retirees). It will not include the specific securities to be purchased, but will include the types that may be placed in the portfolio. The Summary Plan Description (SPD) is a Department of Labor (DOL) required document that gives employees a summary of the plan and its features. It has nothing to do with determining how the money is invested.

One of the major changes incorporated into the Uniform Prudent Investors Act of 1994 was the ability of a trustee to delegate certain responsibilities to qualified third parties. However, a fiduciary would not be able to delegate: A) which investment style to be used for managing the portfolio. B) the amount and timing of distributions. C) the selection of different managers for different asset classes. D) the ability to decide on the specific securities to be acquired.

Answer: B The UPIA allows a fiduciary to delegate the investment decisions to a qualified third party. Determining distribution amounts and timing is not part of portfolio management and can only be done by the fiduciary (trustee).

A young customer who is a novice investor wishes to begin an investment program. He is eligible for his employer's 401(k) plan, to which the employer makes matching contributions, but he does not participate in the plan. Your advice to the customer should be to begin: A) by taking positions in individual stocks. B) making payroll deduction contributions to the employer's 401(k) plan at least to the employer's matching level. C) by making regular contributions to a growth mutual fund. D) by making regular contributions to an income mutual fund.

Answer: B The first piece of advice to offer a customer eligible for a 401(k) plan is to make regular contributions to the plan, particularly when the employer makes matching contributions.

Which of the following investment activities are acceptable for a fiduciary acting under the prudent expert rule? Purchasing AAA rated debentures. Purchasing a growth mutual fund. Purchasing new issues of an AAA rated issuer. Writing covered calls on dividend-paying stocks. A) II and IV. B) I, II, III and IV. C) I and II. D) II and III.

Answer: B The prudent expert rule permits a fiduciary to invest in securities that a prudent expert might buy. These investments are nonspeculative, low-to-moderate risk, and likely to be considered prudent if they are used in a way consistent with modern portfolio theory (MPT).

To comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must offer plan participants at least ten different investment alternatives. allow plan participants to exercise control over their investments. allow plan participants to change their investment options no less frequently than monthly. provide plan participants with information relating to the risks and performance of each investment alternative offered. A) II and III. B) II and IV. C) I and III. D) I and IV.

Answer: B To comply with the safe harbor provisions of ERISA's Section 404(c), the plan trustee must allow each participant control over her investments and furnish her with full performance and risk information. The rule only mandates a minimum of 3 alternatives and quarterly changes.

Under ERISA, a fiduciary must act in all of the following ways EXCEPT: A) in accordance with the governing plan documents unless they are not consistent with ERISA. B) confining investments to only those most likely to achieve growth. C) solely in the interest of plan participants and beneficiaries. D) with care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character.

Answer: B Under ERISA, a fiduciary is not required to confine investments to only those most likely to achieve growth. The fiduciary is required to diversify investments so as to minimize the risk of losses, unless doing so is clearly not prudent under the circumstances.

One of your clients has reached his company's mandatory retirement age of 67. He has been a participant in his employer's 401(k) plan and his account is valued at $400,000. The account is funded with mutual funds and company stock. The cost basis of the company stock is $25,000 and it is currently worth $125,000. If he were to use the net unrealized appreciation (NUA) approach when taking the distribution of the company stock, the tax treatment would be: A) long-term capital gain on the entire $125,000. B) ordinary income on the $25,000 cost basis, long-term capital gain on the appreciation when sold. C) ordinary income on the entire $125,000. D) ordinary income on the $25,000 cost basis, short-term capital gain on the appreciation when sold.

Answer: B Under IRS rules, if part of your retirement plan assets includes company stock, taking that as a distribution (not rolling it over into an IRA) subjects the cost basis to ordinary income tax and any unrealized appreciation is taxed as long-term capital gain when sold.

All of these would be characteristics of a traditional 401(k) plan EXCEPT: A) employees can choose from a variety of investment options. B) employees may have a portion of their contribution matched by the employer. C) the employer can contribute more than 15% of total payroll. D) in service employees may be eligible for hardship withdrawals.

Answer: C 401(k) plans provide for hardship withdrawals, a choice of investment options, and employer matching.

With regard to ERISA and a qualified retirement plan, which of the following would NOT constitute a conflict of interest between the plan and a fiduciary? A) A fiduciary participates in a transaction on the plan's behalf that involves a party with interests adverse to those of the plan, to ensure favorable terms for the plan. B) A fiduciary offers reduced commissions to the plan for transactions that are executed through his employing financial institution. C) The fiduciary receives fees for acting as a trustee to the plan. D) A fiduciary sells a real estate investment to the plan at the current market rate.

Answer: C A fiduciary may receive compensation from the plan's sponsor for acting as a trustee, if fees are reasonable and consistent with duties performed.

Under ERISA, a fund manager wishing to write uncovered calls may do so: A) without restrictions. B) if approved by the IRS in writing. C) under no circumstances. D) if explicitly allowed in the plan document.

Answer: C ERISA prohibits retirement plans from making investments that are excessively speculative such as uncovered call writing, which possesses unlimited risk.

A basic difference between a Section 457 plan established on behalf of a governmental entity and one established by a private tax-exempt organization is that: A) a governmental plan cannot make a distribution before the participant attains age 70½. B) a tax exempt plan's distributions are not eligible for a favorable lump sum 10-year averaging treatment. C) a governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants. D) a tax-exempt plan participant does not have to include plan distributions in his or her taxable income.

Answer: C A governmental Section 457 plan must be funded, that is, it must hold plan assets in trusts or custodial accounts for the benefit of individual participants. Conversely, a tax-exempt (nongovernmental) Section 457 plan may not be funded.

Which of the following is a benefit to an employee of a business offering a safe harbor 401(k) using a non-elective formula? A) The employees are guaranteed the ability to consult an investment adviser. B) The plan is free from the top-heavy testing requirements. C) The employer is required to contribute on the employee's behalf even if the employee does not contribute to the plan. D) It guarantees that highly compensated employees do not get more of an employer match than non-highly compensated employees.

Answer: C A safe harbor 401(k) with a non-elective formula is one in which the employer must contribute a minimum of 3% of each employee's earnings, whether or not the employee participates in the plan. Furthermore, those contributions are immediately vested. As a result, these plans offer a safe harbor from being tested for being top heavy, but this is a benefit for the employer, not the employee.

A prospective client has been interviewing a number of investment advisers and wishes to see your firm's investment policy statement. Your IPS would probably include which of the following headings? Investment objectives. Investment philosophy. Investment selection criteria. Monitoring procedures. A) II and IV. B) I and II. C) I, II, III and IV. D) I, III and IV.

Answer: C Although there are no rules requiring that an IA develop an investment policy statement, it is a recommended procedure. Each of these four items would be found in a typical IPS. Please note that the IPS would include the criteria for selecting investment, but not the listing of the actual investments themselves.

Which one, if any, of these transactions will be treated as a prohibited transaction under the provisions of the ERISA legislation? A) The furnishing of office space to a plan trustee for reasonable compensation and fair rental value. B) None of these transactions constitute a prohibited transaction under the provisions of the legislation. C) An investment adviser using the interest from plan assets to cover the adviser's office expenses. D) A loan between a 401(k) plan and plan participant.

Answer: C An investment adviser, as a fiduciary and disqualified person under the plan, is prohibited from using plan assets in payment of personal obligations (such as outstanding office expenses). Loans from a 401(k) plan to a participant are not prohibited transactions. The plan trustee may rent space from the plan (one of the plan's assets is an office building).

The Chief Financial Officer (CFO) of a company approaches an investment adviser representative who happens to be the trustee of the corporation's qualified plan requesting a loan from the plan to help the company meet some short-term obligations. Which of the following would be the appropriate action to be taken by the IAR? A) With sufficient collateral, the loan may be made. B) The IAR is permitted to meet any reasonable request from the CFO of the employing company. C) The IAR is prohibited from making this loan because of his fiduciary responsibility to the plan. D) The IAR is prohibited from making this loan if it is not a part of the asset allocation model used in the plan's investment policy statement.

Answer: C As the plan fiduciary, the IAR is prohibited from taking any action that is against the rules. Companies can not use their qualified plan assets to finance their business operations.

One of your clients has reached his company's mandatory retirement age of 67. He has been a participant in his employer's 401(k) plan and his account is valued at $400,000. The account is funded with mutual funds and company stock. The cost basis of the company stock is $25,000 and it is currently worth $125,000. If he were to rollover the entire account into an IRA, the tax treatment would be: A) no current tax on the portion applicable to the mutual funds; ordinary income on the cost basis of the company stock; and long-term capital gains on the unrealized appreciation of the company stock when it is sold. B) current tax at ordinary income rates on the unrealized appreciation of the company stock, ordinary income rates on the balance when withdrawals are taken. C) no current tax, but any withdrawals would be taxed as ordinary income. D) no current tax, but any withdrawals representing the gain on the company stock would be taxed as long-term capital gains.

Answer: C As with any rollover from a qualified plan to an IRA, there is no current tax, but withdrawals are taxed at ordinary income tax rates. This client would have saved had he taken advantage of the NUA (Net Unrealized Appreciation) approach. In that case, taking the company stock and putting it into a taxable account would have resulted in ordinary income tax on the $25,000 cost basis, and long term capital gain rates on the appreciation whenever the stock was sold.

Jesse Liverless is the trustee of the Short Circuit Electric Corporation 401(k) plan. Jesse would be able to reduce his ERISA fiduciary exposure if A) the firm provided educational sessions to participants covering the basics of investing B) loans to participants were permitted C) the plan offered a broad index fund, a medium term government bond fund and a cash equivalent fund D) the plan provided for account reports no less frequently than annually

Answer: C ERISA Section 404 (c) describes a safe harbor for 401(k) plan fiduciaries. Among the requirements is to provide at least three different investment alternatives with a range of risk and provide account access no less frequently than quarterly.

Which of the following is NOT required under ERISA Section 404(c)? A) Plan participants must have access to a broad range of investment alternatives. B) Individual accounts must be provided for each plan participant. C) All plan participants must have been employed by the plan sponsor for a minimum of 3 years. D) Each plan participant must have the ability to exercise independent control over assets in her account.

Answer: C ERISA Section 404(c) relieves the employer of fiduciary responsibility for investment decisions made by employees. To qualify for this protection, employees must enjoy the benefits and risks of their decisions (individual accounts), have the right to exercise independent control over the account, and have a sufficiently broad range of choices to make the right of control meaningful. Section 404(c) has nothing to do with the employee's length of employment.

Under ERISA, which of the following activities may a fiduciary employ for a corporate retirement plan? A) Loan funds to the plan at favorable interest rates. B) Lease office space to the plan. C) Employ third-party pension consultants to advise the plan on the purchase of complex financial instruments. D) Charge a reasonable commission for the purchase of interests in a real estate partnership that the fiduciary owns.

Answer: C Employing third-party consultants to advise the plan on complex financial instruments is permissible, but parties in interest cannot engage in self-dealing under ERISA.

Which of the following statements is NOT an accurate description of the Employee Retirement Income Security Act of 1974 (ERISA) guidelines? A) A uniform formula must determine all employees' benefits and contributions to ensure equitable and impartial treatment. B) Employees must be entitled to their entire retirement benefit even if they no longer work for the employer. C) Funds contributed to the plan need not be segregated from corporate assets providing they are in custodial accounts for the benefit of covered employees. D) Full time employees must be covered in a reasonable period, generally defined by ERISA as no more than one year.

Answer: C Funds contributed to the plan must be segregated from corporate assets.

A premature distribution from an IRA would be exempt from the premature distribution penalty under all of the following circumstances EXCEPT: A) upon the death of the IRA owner. B) to pay for qualifying medical expenses. C) as a result of hardship. D) to correct an excessive contribution to the IRA.

Answer: C Hardship withdrawals are not permitted from IRAs. They are a feature permitted in 401(k) plans.

One of your clients has told you that his employer has just instituted a Roth 401(k) plan. If they wish to make matching contributions: A) they may contribute a specified percentage of his pay to the Roth 401(k). B) current tax law does not permit matching contributions to be made on behalf of any employee participating in a Roth 401(k) plan. C) they may contribute a specified percentage of his pay to a regular 401(k). D) he may choose as to whether he wants the matching contribution made to the Roth 401(k) or a regular 401(k).

Answer: C In order to have matching contributions, participants in a Roth 401(k) plan must actually have two accounts - the Roth and a regular 401(k). The employer contributions are made on a tax deductible basis to the regular 401(k) and are fully taxable upon withdrawal.

Each of the following is a defined contribution plan EXCEPT: A) a profit-sharing plan (qualified). B) a money-purchase pension plan. C) a stock option plan. D) a 401(k) plan.

Answer: C Money-purchase pension plans, 401(k) plans, and qualified profit-sharing plans are all examples of defined contribution plans.

What term is used to describe which employees will be covered by a pension plan? A) Funding. B) Party in interest. C) Eligibility. D) Vesting.

Answer: C Pension plans must have a uniform nondiscriminatory eligibility program. All employees must be covered when they become eligible, which means reaching 1 year of service working full-time and age 21.

Which of the following statements regarding ERISA is TRUE? A) It covers individual retirement accounts. B) It regulates banks and insurance companies. C) It covers employees in the private sector. D) It covers employees in the public sector.

Answer: C The Employee Retirement Income Security Act (ERISA) is a federal regulation that protects the retirement funds of corporate employees in the private sector.

ERISA, a Federal Retirement Act, was created to protect which of the following? A) Individual retirement accounts (IRAs). B) Banks and insurance companies. C) Employees in the private sector. D) Employees in the public sector.

Answer: C The Employees Retirement Income Security Act of 1974 (ERISA) is designed to cover employees in the private sector. In this context, private sector means corporate employees; public sector means government employees.

The Employment Retirement Income Security Act of 1974 (ERISA) is a: A) state law establishing a pension system for state employees. B) state law regulating many aspects of private retirement plans. C) federal law regulating many aspects of private retirement plans. D) federal law establishing the Social Security system.

Answer: C The Employment Retirement Income Security Act of 1974 (ERISA) is a federal law that regulates many aspects of retirement plans established by employers in the private sector, It was enacted to help protect the rights of employees who participate in retirement plans. ERISA provides many of the rules that retirement plans must meet if they want to be considered qualified plans.

An IAR handling the portfolio of a senior citizen with diminished mental capacity is deemed to be acting as a fiduciary and, therefore, bound by the provisions of the Uniform Prudent Investor Act. Compliance with the act would require the IAR to: make sure that the investment allocation is done prior to the renewal date of the contract. use skill and caution in making investment recommendations. carefully consider the risks of all investments. seek to meet the client's objectives with minimum risk. A) II and IV. B) III only. C) II, III and IV. D) I, II, III and IV.

Answer: C The UPIA requires that fiduciaries act with skill and caution in an effort to meet their clients objectives. In so doing, they should attempt to maximize returns while minimizing risks. What does making the allocation prior to contract renewal have to do with properly serving your client?

Which of the following is TRUE of the tax consequences when a participant in a noncontributory pension plan withdraws a monthly income at retirement? A) The income is taxable as capital gains. B) The income is partly taxed as ordinary income and partly taxed as capital gains. C) The income is taxable as ordinary income. D) The income is nontaxable.

Answer: C The employer has been making all of the contributions to the pension plan. Noncontributory means that the employee has made no contributions. Under the Internal Revenue Code, the income to the retiree from the plan is ordinary income.

Section 404(c) of ERISA deals with: A) distribution options. B) tax qualification of the plan. C) fiduciary responsibilities. D) eligibility requirements.

Answer: C The requirement for a retirement plan trustee to follow fiduciary standards is found in Section 404 (c) of ERISA.

All of the following statements regarding qualified corporate retirement plans are true EXCEPT: A) all qualified retirement plans are either defined contribution or defined benefit plans. B) defined contribution plans have the same contribution limits as Keogh plans. C) with defined benefit plans, the employee bears the investment risk. D) all corporate pension and profit-sharing plans must be established under a trust agreement.

Answer: C With defined benefit plans, the employer (not the employee) bears the investment risk. The employer must fund the defined benefits, regardless of the investment performance of funds set aside for this purpose. The retiree receives a defined benefit regardless of investment performance. All corporate pension and profit-sharing plans must be established under a trust agreement. All qualified retirement plans are either defined contribution or defined benefit plans. Defined contribution plans have the same contribution limits as Keogh plans.

Which of the following circumstances must be met for a fiduciary to trade options in a trust account? Special circumstances determined by the broker/dealer. The trust agreement states the trustee has the power to trade options. The trust's investment objectives are determined to be compatible with options trading. Only covered options may be traded by a fiduciary. A) I and III. B) I and IV. C) II and IV. D) II and III.

Answer: D A fiduciary account may only trade options if expressly authorized to do so and if suitable for the beneficial owner of the account.

Which of the following phrases best describes a prudent investor? A) A person in a fiduciary capacity who invests in a prudent manner. B) An investment adviser representative handling a discretionary account. C) The custodian for a minor under the Uniform Transfers to Minors Act. D) A trustee who invests with reasonable care, skill, and caution.

Answer: D Although all of these may have a fiduciary responsibility, the definition, as expressed in the Uniform Prudent Investor Act of 1994, requires reasonable care, skill, and caution.

Under ERISA Section 404(c), plan participants must be able to reallocate plan assets: A) daily. B) annually. C) once every week. D) once every 3 months.

Answer: D Although many 401(k) plans provide for daily reallocation of plan assets, Section 404(c) requires that plan participants be able to reallocate plan assets, through Internet trading or other methods, at least once every 3 months.

An employer whose 401(k) plan complies with ERISA Section 404(c) is placing investment risk with the: A) Internal Revenue Service. B) plan fiduciary. C) Securities and Exchange Commission. D) plan participant.

Answer: D In a 401(k) plan, a plan sponsor can shift investment risk to the employee by complying with ERISA Section 404(c) rules.

Which of the following statements regarding loans from 401(k) plans is NOT correct? A) They must be made in accordance with the loan provisions stipulated in the 401(k) plan. B) They must bear a reasonable rate of interest. C) They must be adequately secured. D) They must be made available to highly compensated employees in amounts greater than that made available to other employees.

Answer: D Loans must be repaid with interest, generally within 5 years. They must be secured and made in accordance with plan provisions. Loans may not be made available to highly compensated employees in amounts greater than that made available to other employees.

To comply with ERISA Section 404(c), a 401(k) plan must satisfy all the following requirements EXCEPT: A) plan participants must have access to at least 3 core diversified investment options. B) plan participants must have the ability to transfer assets among investment options at least quarterly. C) sufficient information must be provided to plan participants about investment alternatives available under the plan to permit informed decision making. D) plan participants must be provided with the services of a Certified Financial Planner at least annually to assist them with investment decision making.

Answer: D Section 404(c) relieves a plan fiduciary from liabilities associated with losses stemming from employee investment choices. To qualify for this protection, the plan must provide at least 3 core diversified investment options, participants must have the ability to transfer assets among investment options at least quarterly, and sufficient information must be provided to participants to allow for informed decision making.

The nondiscrimination rules imposed on qualified retirement plans by the Internal Revenue Code are intended primarily to ensure that retirement plans do not discriminate: A) against a company's owners, top executives, and key employees. B) against female employees. C) against employees over age 40. D) in favor of a company's owners, top executives, and key employees.

Answer: D The IRS nondiscrimination rules are primarily intended to ensure that qualified retirement plans do not discriminate in favor of owners, executives, and key employees at the expense of rank-and-file workers. A retirement plan that excessively benefits key employees is said to be top-heavy and must meet additional special requirements.

A pension plan administrator hires an investment adviser to oversee the investment decisions of the plan. The adviser's primary responsibility is to which of the following? A) The pension plan administrator. B) The plan sponsor. C) The adviser. D) The plan.

Answer: D The adviser's primary fiduciary responsibility is to the plan itself. By maintaining proper fiduciary responsibility to the plan, the interests of the participants of the plan are protected.