Series 66: Financial Profile / Ret. and Educ. Savings Plans (Retirement Plans)

All of the following retirement plans could be available to an individual that works for a for-profit corporation EXCEPT:

403(b) 403(b) plans are salary reduction plans that are only available to the not-for-profit sector (e.g., not-for-profit hospitals, school systems). 401(k) plans are salary reduction plans that are only available to the for-profit sector. Anyone with earned income can open an IRA; and anyone with earned income, and whose income is not too high, can open a Roth IRA.

A nonqualified retirement plan that is established by a non-profit organization is a:

457 plan 457 plans are "add on" plans to government sponsored defined benefit plans and 403(b) plans. 403(b) plans are similar to 401(k)s - they are salary reduction plans that allow employees to contribute up to $19,500 in 2020. 401(k)s are for the corporate sector, while 403(b)s are for the not-for-profit government sector. As an added benefit for higher level employees, not-for-profit employers can establish a 457 plan. This is not a qualified plan because it is discriminatory. An additional $19,500 can be contributed in 2020 as a salary reduction by these higher level employees. 529 plans are college savings plans and are not retirement plans.

What is the first age where an individual can claim full social security benefits?

67 Full retirement age in the social security system is generally 67 - meaning that a full retirement benefit can start being collected. However, individuals can defer collecting benefits until age 70, and then the payment amount will be roughly 20% more than if payments started at age 67. There is no benefit to deferring taking benefits after age 70, because the monthly benefit amount will no longer increase.

Which statement about the taxation of 403(b) plans is TRUE?

Employee salary deferrals reduce the employee's taxable income Employee salary deferrals contributed to a 403(b) plan reduce the employee's taxable income for that year. Employer matching contributions are not deductible by the employer, because the employer is a non-profit organization. Early withdrawals (prior to age 59 1/2) due to death or disability are subject to income tax but avoid the 10% penalty tax. Distributions at any age are 100% taxable.

A money purchase retirement plan is: I a defined contribution plan II a defined benefit plan III employer mandatory IV employer voluntary

I and III A money purchase plan is a type of defined-contribution plan that is similar to a profit-sharing plan, except that the contribution amounts are fixed rather than variable. Thus, employers are required to make annual contributions to each employee's account regardless of the company's profitability for the year. The maximum permitted contribution made by the employer is 25% of income (statutory rate, 20% effective rate), capped at $57,000 in 2020.

Which of the following statements concerning 403(b) plans are TRUE? I Investments are limited to annuities II An employee who elects salary deferral to a 403(b) plan cannot elect salary deferral to another retirement plan III A 403(b) plan can provide only for employee contributions without employer contributions IV Deferrals to a 401(k) plan reduce the amount that an employee can defer to a 403(b) plan

III and IV only A 403(b) plan is typically invested in annuities or mutual funds but can also be invested in life insurance. The "big kahuna" of 403(b) plans is "TIAA-CREF" - Teacher's Insurance Annuity Association - College Retirement Equity Fund. TIAA-CREF administers retirement plans for not-for-profits, including school systems, universities and hospitals. Its name gives you the clue as to which investments are permitted in 403(b) plans. The permitted investments are life insurance, fixed annuities, variable annuities and mutual funds. Direct investments in common stocks are not allowed; the investments must be managed by a professional manager. If an employee is eligible to participate in both a 401(k) plan and a 403(b) plan, the $19,500 contribution limit in 2020 is applied to both of these combined. Thus, if $9,750 is contributed to a 401(k) plan, that person could only contribute $9,750 to a 403(b). Both 401(k) and 403(b) plans can provide for employee contributions without employer contributions or can provide for employee contributions and matching employer contributions. (Also note that TIAA-CREF shortened its name in 2016 to simply TIAA, but knowing the original name helps with test questions!)

Among qualified plans, which feature is unique to 401(k) retirement plans?

Matching employer contributions 401(k) plans are unique among qualified plans in that employers may contribute to match contributions that the employees make. In other qualified retirement plans, either the employer or the employees make the contributions, but never both.The other features listed characterize all qualified plans - tax-deductible contributions, tax-deferred build-up of earnings, and commencement of distributions beginning at age 59½ without penalty.

Which of the following is NOT a fiduciary under ERISA?

Plan participant Retirement plan trustees, plan investment advisers and plan administrators all owe a fiduciary responsibility to the plan participants. Remember, they are being paid for their work by the plan and they must act in the best interests of the plan participants. Note, however, that each plan participant has no fiduciary responsibility to the plan.

What type of real estate can be held in an Individual Retirement Account?

Rental property Real estate can be owned in an IRA as an investment only. Personal use real property cannot be owned in an IRA - this is a "so-called" prohibited transaction.

If a non-working spouse claims social security benefits, this will:

not reduce the benefit that will be paid to the working spouse Even if a spouse has never worked, he or she is entitled to a social security benefit equal to 50% of the amount that would be paid to the working spouse. The taking of the benefit does not reduce the benefit that will be paid to the working spouse at retirement.

A couple earning $50,000 per year makes an annual contribution of $6,000 to a Traditional IRA in 2020. Which statement is TRUE?

This couple can contribute a maximum of $6,000 to a Roth IRA The maximum permitted contribution to a Traditional IRA or Roth IRA for a couple is $12,000 total in 2020. This can be divided between the 2 types of accounts. In this case, since $6,000 was contributed to the Traditional IRA, another $6,000 can be contributed to a Roth IRA in 2020.

Which statement is TRUE about a 73-year old man that is still employed earning $30,000 who has a Roth IRA?

This person can continue to make non-tax deductible contributions Roth IRA contributions can continue as long as that person has earned income - but remember that Roth IRA contributions are not deductible. Thus, Choice B is true and Choice A is false. And unlike Traditional IRAs, there are no required minimum distributions after age 72 for Roth IRAs - the IRS does not care because the distributions are not taxable. Thus, Choice C is false. The beneficiary on any account can be changed at any time by the account owner, making Choice D false.

Why would an individual purchasing life insurance establish an ILIT?

To exclude the death benefit from the decedent's estate An ILIT is an Irrevocable Life Insurance Trust. A fact that is not commonly known is that the proceeds paid upon death from a life insurance policy are included in the decedent's taxable estate. To avoid this, the life insurance policy can be transferred into an ILIT. The owner of the policy cannot be the trustee and the owner must give up control of the policy. Typically, the grantor of the trust gives an annual gift to the trust to fund the premium payment. As long as the annual amount is under $15,000, no gift tax is paid by the grantor on this. Upon death, the death benefit is paid to the ILIT, and the ILIT distributes the funds to the designated beneficiaries.

A closely-held corporation has a defined benefit plan for its officers and employees. Due to a stock market decline, the plan is underfunded and the corporation does not have enough cash to make its minimum pension contribution. To meet the shortfall, the President of the corporation wants to donate a valuable oil painting to the plan. This action is:

a prohibited transaction between the plan and a party-in-interest ERISA specifies prohibited transactions between the plan trustee and so-called "parties-in-interest." A "party-in-interest" is any fiduciary, counsel or employee of the plan; or any employer whose employees are covered by the plan. The prohibited transactions include: Sale, exchange or lease of property between the plan and a "party-in-interest;" Loan between the plan and a "party-in-interest;" Furnishing of goods, services or facilities between the plan and a "party-in-interest;" Transfer of plan assets to a "party-in-interest" or use of plan assets by a "party-in-interest."

An individual who has not reached retirement age who has an IRA account dies, splitting the estate equally between his wife and his 2 sons. The wife is age 60, one son is age 35 and the other son is age 30. The wife will be required to start taking distributions:

after 12 years When an IRA account is left to a beneficiary, how it is treated depends on whether the beneficiary is a spouse or non-spouse. If the beneficiary is a spouse, he or she may "roll over" the assets into an IRA and maintain tax-deferred status. Distributions can commence at any time, but must start at age 72. Since the wife is 60 years old, she has 12 years before distributions must start. If the beneficiary is a non-spouse, the assets are transferred into an "inherited IRA account" and must be depleted over the following 10 years. (There are some exceptions, but this is the general rule.)

All of the following statements are true about Individual Retirement Accounts EXCEPT:

all contributions reduce the individual's taxable income Contributions to IRAs are based solely upon personal service income; other income sources such as interest and dividends do not count. Contributions may be made, even if the individual is covered by another pension plan; however, they may not be tax deductible if the person's income is too high (making Choice A wrong). IRA "rollover" rules allow pension plan distributions rolled over into an IRA within 60 days to remain tax deferred.

All of the following statements concerning taxation of 401(k) plans are correct EXCEPT:

employer contributions are taxable to employees in the year contributed Employee contributions to a 401(k) reduce taxable income, so these are made with pre-tax dollars. Thus, they avoid taxation in the year contributed. Any matching employer contributions are not taxable to the employee when contributed; they are tax deductible to the employer, so these are also pre-tax dollars. Earnings in the account build tax-deferred, so these dollars have not been taxed. When distributions commence, none of the money has ever been taxed, so now each payment received is 100% taxable at ordinary income tax rates.

A pension fund trustee would be LEAST concerned about the:

individual thoughts and concerns of the plan participants A pension trustee is a fiduciary whose role is to protect fund assets from mismanagement or misuse. The trustee would be concerned that the fund assets are invested safely and that they can provide for the fund's potential pension liabilities. The trustee is not concerned about each individual who is covered by the pension fund - he or she is concerned about the covered group of individuals as a whole.

A QDRO is a(n):

judgment, order, or decree issued by a state court approving a property settlement agreement A QDRO (Qualified Domestic Relations Order) is a court order in a divorce or separation agreement that divides the assets of an ERISA pension plan (which can only be in 1 person's name) among an "alternate payee" or "alternate payees." The alternate payee can be the former spouse, a child or a dependent. The actual division of the retirement account value is based on whether the account was established before or after the marriage. If it was established after the marriage, then the plan assets are generally split 50/50. If the retirement account was established before the marriage, then the division is based on the asset increases after the date of marriage.

Which of the following is a precious metal investment that is permitted in an IRA account?

platinum Precious metals bullion investments are permitted in an IRA. This includes gold, silver, platinum, and palladium bullion.

All of the following statements concerning "catch up" contributions to IRAs are correct EXCEPT:

"Catch-up" contributions are not permitted for high-earning individuals "Catch-up" contributions (an additional $1,000 for an individual age 50 or older) can be made to both Roth IRAs and Traditional IRAs. The contribution amount can be divided between the 2 types of IRAs, but cannot exceed the dollar limit when both accounts are aggregated together. Catch-up contributions are not phased-out as income increases (which is true for contributions to Roth IRAs, but not for Traditional IRAs).

Which is NOT a feature of a safe harbor 401(k) plan?

100% of eligible employees must choose to participate A safe harbor 401(k) relieves the employer of having to perform annual benefits testing to show that the plan does not favor highly compensated employees (a so-called "top-heavy" plan). To get the safe harbor, the employer must agree to make annual matching payments into the plan of either 4% of salary of participating employees or 3% of salary of all eligible employees (it is not mandatory that each eligible employee participate). These employer-paid benefits must 100% vest immediately.In contrast, in a Traditional 401(k), the employer can choose whether to make matching contributions and these can vest over a number of years (typically 5 years). Also, in a Traditional 401(k), the employer must complete an annual "top heavy" benefits test.

What portfolio construction is most appropriate for a retired school teacher who is age 60?

40% common stock / 60% bonds As one gets older, portfolio composition should shift to "safer" assets that generate reliable income. The general rule is to take "100 minus the investor's age" to get the appropriate investment portion to be held in stocks. Since this investor is age 60, this gives 40% of the portfolio holding in stocks; with the remaining 60% of the holding in bonds. Note that a 100% bond holding is not appropriate because people are living much longer and they need the "extra return" that is provided by stocks that can grow in value, on top of the somewhat lower fixed return provided by bonds.

Which of the following retirement plans is a non-qualified plan?

457 plan A 457 plan is similar to 401(k) and 403(b) plans, except that it can only be established by government employers (and certain non-profit employers). These are non-qualified plans because they are discriminatory. They generally are only available, as an added benefit, to higher earning government employees. The maximum salary reduction contribution is the same for 457 plans as it is for 401(k) and 403(b) plans - $19,500 in 2020. The amount contributed is a salary reduction. Earnings build tax deferred. When distributions are taken, they are 100% taxable. A major difference is that there is no 10% penalty tax for early withdrawals from 457 plans. This is the case because 457 plans often cover senior firemen and policemen, who might be forced to take early retirement due to disability, and if this occurs, there is no 10% penalty tax.

Which statement is TRUE about 457 plans?

457 plans are discriminatory and only cover highly compensated employees 457 plans are deferred compensation salary reduction plans that only available to state and municipal employees and not-for-profits. They are designed to offer this benefit only to highly compensated employees (management) and so, are non-qualified plans under ERISA rules because they are discriminatory. The contribution amount is the same as for 401(k) and 403(b) plans ($19,500 in 2020). Also note that if the not-for-profit employer has both a 403(b) plan for rank and file employees and a 457 plan for highly compensated employees, these highly compensated managerial employees can contribute the maximum to both plans.

What is the earliest age where funds can be distributed from a 401(k) without a tax penalty?

55 A little known rule for both 401(k) and 403(b) plans is that if an employee quits or is terminated between the ages of 55 to 59 1/2, the "Rule of 55" can be applied. This IRS rule allows the terminated employee to take payments in equal installments over his or her life expectancy and avoid the 10% penalty tax. Note that regular income tax must still be paid.

An individual who wants to get the largest monthly payments from social security should not start taking payments until age:

70 Full retirement age in the social security system is generally 67 - meaning that a full retirement benefit can start being collected. However, individuals can defer collecting benefits until age 70, and then the payment amount will be roughly 20% more than if payments started at age 67. There is no benefit to deferring taking benefits after age 70, because the monthly benefit amount will no longer increase.

Which statement is TRUE about the taxation of social security benefits for an individual?

85% of social security benefits are taxable if the individual has a combined income of more than $34,000 Social security benefits are taxable. However, a portion of the benefit is excluded from tax. For an individual, if that person's combined income is between $25,000 and $34,000, 50% of the benefit is taxable. If that individual's combined income is more than $34,000, then 85% of the benefit is taxable. In contrast, if a married couple has a combined income between $32,000 and $44,000, then 50% of the benefit is taxable. If their combined income is more than $44,000, then 85% of the benefit is taxable.

Which statement is TRUE about a non-working spouse collecting social security benefits?

A non-working spouse is entitled to social security benefits equal to 50% of the amount earned by the working spouse Even if a spouse has never worked, he or she is entitled to a social security benefit equal to 50% of the amount that would be paid to the working spouse. The taking of the benefit does not reduce the benefit that will be paid to the working spouse at retirement.

Who CANNOT participate in a 403(b) plan?

A student at a public college Students are not eligible for participation in a 403(b) plan since they are not employees. Eligible persons must be employees (not independent contractors) of a public school system or a 501(c)(3) organization such as a hospital, charity, church, or university.

Which type of account can be set up by an individual to pay for long-term medical expenses?

HSA A Health Savings Account can be set up by an individual who is covered by a high-deductible health insurance plan. A deductible contribution is made to the HSA (in 2020, it is a maximum of $3,550 for an individual and $7,100 for a couple). Earnings build tax-deferred and distributions used to pay for qualified medical expenses are not taxable - so there are 3 tax benefits. Only HSAs permit the funds to be invested, and the individual owns the account. An HRA is a Health Reimbursement Arrangement. It is a fund set up by the employer, who sets aside a certain amount of money each year to pay for medical expenses not covered by the employer's health plan, such as deductibles or coinsurance. Only the employer can put money into an HRA. An FSA is a Flexible Spending Account. It is set up by the employer, usually as an added benefit to the employer's health insurance policy. The money is contributed by the employee (up to $2,750 in 2020) via a salary reduction, similar to a 401(k) contribution. The employee decides on the amount to be contributed each year, and the funds must be used to pay for medical and dental expenses in that year, otherwise they are lost. The benefit to the employee is that the amount spent on medical and dental expenses via the FSA each year is paid with "pre-tax" dollars.

Health Saving Accounts (HSAs) are: I employer-established II employee-established III funded with tax-deductible contributions IV funded with non tax-deductible contributions

I and III Health Savings Accounts (HSAs) were first authorized by Congress starting in the beginning of 2004. They are a tax advantaged medical savings account that is owned by the individual. They are established by corporate employers as part of their health insurance plans, and only plans that have a high deductible can set up HSAs for employees. More employers are adopting these high-deductible plans coupled with HSAs as a way of reducing, or slowing the growth of, their health insurance expenses. The HSA permits the employer or employee to make a deductible contribution in 2020 of up to $3,550 for a single individual; or $7,100 for a family; to the account. The contribution amount is indexed for inflation annually. The account is invested in a similar manner to an IRA. It grows tax-deferred and withdrawals to pay for qualified medical expenses are tax-free.

Money purchase retirement plans: I are established by the employer II are established by the employee III require annual mandatory employer contributions IV require annual mandatory employee contributions

I and III Money purchase retirement plans are permitted under ERISA. They are established by the employer and require mandatory annual employer contributions (25% of income maximum (statutory rate; 20% effective rate) up to $57,000 in 2020). These contributions can be subject to a vesting schedule, which is also the case for defined contribution and defined benefit plans. Unlike Keogh plans, where an annual contribution is not required, money purchase plans must be funded annually at the percentage formula established in the plan. There are no employee contributions made to this type of plan.

Which statements are TRUE regarding distributions from 457 plans? I Distributions taken at any age are subject to tax II Distributions taken at any age are tax free III Distributions taken prior to age 59 1/2 are subject to a 10% penalty tax IV Distributions taken prior to age 59 1/2 are not subject to a 10% penalty tax

I and IV A 457 plan is similar to 401(k) and 403(b) plans, except that it can only be established by government employers (and certain non-profit employers). These are non-qualified plans because they are discriminatory. They generally are only available, as an added benefit, to higher earning government employees. The maximum salary reduction contribution is the same for 457 plans as it is for 401(k) and 403(b) plans - $19,500 in 2020. The amount contributed is a salary reduction. Earnings build tax deferred. When distributions are taken, they are 100% taxable A major difference is that there is no 10% penalty tax for early withdrawals from 457 plans. This is the case because 457 plans often cover senior firemen and policemen, who might be forced to take early retirement due to disability, and if this occurs, there is no 10% penalty tax.

A money purchase retirement plan: I requires mandatory employer contributions II does not require mandatory employer contributions III requires mandatory employee contributions IV does not require mandatory employee contributions

I and IV A money purchase plan is a type of defined-contribution plan that is similar to a profit-sharing plan, except that the contribution amounts are fixed rather than variable. Employers are required to make annual contributions to each employee's account regardless of the company's profitability for the year. Employees do not make contributions to money purchase plans. The maximum permitted contribution made by the employer is 25% of income (statutory rate, 20% effective rate), capped at $57,000 in 2020.

A Roth IRA is left to a named beneficiary. Which statements are TRUE? I The value of the Roth IRA is included in the gross estate of the deceased individual II The value of the Roth IRA is not included in the gross estate of the deceased individual III The value of the Roth IRA is taxable income to the beneficiary IV The value of the Roth IRA is not taxable income to the beneficiary

I and IV All IRA assets are included in one's gross estate - it makes no difference if it is a Traditional IRA or a Roth IRA. The beneficiary who receives the Roth has no tax liability - it is the estate that pays the tax due.

Excess contributions to an IRA are subject to a: I 6% penalty tax II 10% penalty tax III only if the account holder is under age 59 1/2 IV regardless of the age of the account holder

I and IV If an individual contributes more than the permitted amount to an IRA, there is a 6% excess contributions tax applied for each year that the "extra" money stays in the account. Note that this tax has nothing to do with the 10% penalty tax applied to premature distributions taken prior to age 59 1/2.

A retirement plan that favors highly compensated employees compared to rank-and-file employees is a: I top heavy plan II key employee plan III qualified plan IV non-qualified plan

I and IV Under ERISA, a "top heavy" retirement plan is one that disproportionately favors upper level employees by giving them excessive retirement benefits that are not available to lower level employees. If a plan is deemed to be "top heavy," then the contributions will not be tax deductible, making the plan non-tax qualified.

Which of the following are characteristics of Defined Contribution Plans? I Annual contribution percentages are fixed II Annual contribution percentages will vary III The benefit amount to be received is fixed IV The benefit amount to be received will vary

I and IV Under a defined contribution plan, a fixed percentage of income is contributed annually for each year that the employee is included in the plan. The longer an employee is in the plan, the greater the benefit that he or she will receive at retirement.

Which of the following are features of a safe harbor 401(k) plan? I Mandatory annual employer matching contributions II No annual "top heavy" benefits testing III Immediate 100% vesting of employer-paid benefits IV 100% of eligible employees must choose to participate

I, II, III A safe harbor 401(k) relieves the employer of having to perform annual benefits testing to show that the plan does not favor highly compensated employees (a so-called "top-heavy" plan). To get the safe harbor, the employer must agree to make annual matching payments into the plan of either 4% of salary of participating employees or 3% of salary of all eligible employees (it is not mandatory that each eligible employee participate). These employer-paid benefits must 100% vest immediately.In contrast, in a Traditional 401(k), the employer can choose whether to make matching contributions and these can vest over a number of years (typically 5 years). Also, in a Traditional 401(k), the employer must complete an annual "top heavy" benefits test.

Which of the following are settlor functions in a pension plan established under ERISA? I Choosing the type of plan II Amending or changing plan options III Terminating a plan IV Acting as investment manager for the plan

I, II, III The "settlor" function of an ERISA plan is to make the business decisions for the plan. These include: choosing the type of plan or plan options; amending the plan or changing plan options; requiring employee contributions (e.g., a 401(k) plan); terminating a plan. The settlor is usually a business executive of the company that establishes the plan. The plan fiduciary is usually an independent trustee. In addition, the investment managers to the plan are fiduciaries. Fiduciaries have control or can exercise investment discretion over the plan.

Under current tax law, which statements are TRUE? I A Roth IRA can be converted into a Traditional IRA II A Traditional IRA can be converted into a Roth IRA III A 401(k) can be converted into a Roth IRA IV A Roth IRA can be converted into a 401(k)

II and III Current tax law allows an individual that holds a Traditional IRA account or a 401(k) account to convert that account into a Roth IRA. Upon conversion into a Roth IRA, the entire amount converted is subject to income tax. However, thereafter any build-up in the account is not taxed, and when distributions commence at retirement age, no tax is due (unlike Traditional IRA or 401(k) distributions which are 100% taxable). Thus, the principal benefit of conversion is that the earnings in the account build tax-free (as opposed to tax-deferred for a Traditional IRA or 401(k)). However, the cost associated with the conversion (which is the fact that any amount converted is taxable at the time of the conversion) must be less than the expected future benefit of tax-free distributions.

Which of the following statements are TRUE regarding the distributions from an Individual Retirement Plan funded with deductible contributions? I Distributions can start at any age II Distributions can start at age 59 1/2 III Distributions are taxable IV Distributions are non-taxable

II and III Distributions from Traditional Individual Retirement Accounts can start at age 59 1/2; and must start by April 1st of the year after reaching age 72. Distributions from Traditional IRAs are taxable at ordinary income tax rates if the contributions in the account were deducted from income when they were made (this is the case with most IRA contributions). Note that if an individual is covered by another qualified retirement plan and if that individual earns too much, the contribution will not be tax deductible; and any distributions are taxed only on the amount received above the original contribution into the plan (which was made with already-taxed dollars, so taxing it again would be a "double tax").

Which statements are TRUE? I The penalty for a premature distribution from an Individual Retirement Account is 6% II The penalty for a premature distribution from an Individual Retirement Account is 10% III The penalty for an excess contribution to an Individual Retirement Account is 6% IV The penalty for an excess contribution to an Individual Retirement Account is 10%

II and III The penalty for a premature (prior to age 59 ½) distribution from an Individual Retirement Account is 10% plus regular income tax. The penalty for putting more money in the account than permitted by law is 6% annually.

All of the following retirement plans allow for the same maximum salary reduction contribution EXCEPT a:

Money Purchase Plan A 457 plan is similar to 401(k) and 403(b) plans, except that it can only be established by government employers (and certain non-profit employers). These are non-qualified plans because they are discriminatory. They generally are only available, as an added benefit, to higher earning government employees. The maximum salary reduction contribution is the same for 457 plans as it is for 401(k) and 403(b) plans - $19,500 in 2020. The actual percentage that can be contributed is set by the plan sponsor (the employer). Money purchase plans are defined contribution retirement plans that do not provide for salary reduction contributions. The employer can make a maximum annual contribution of 25% of income (statutory rate = 20% effective rate), up to $57,000 in 2020.

When are losses on securities positions held in a Roth IRA deductible to the owner of the account?

Only if the Roth IRA is liquidated and the investments are sold for less than their cost basis Losses on securities positions that were purchased and then sold within a Traditional IRA or a Roth IRA are not deductible. The only way that losses can be deducted on a Traditional or Roth IRA is for the owner to close out all IRA accounts of that type (either Traditional or Roth) and sell the securities positions in all the accounts for less than their cost basis. Then the customer will have a deductible loss. This is only likely to be of interest to a customer where the securities positions in the account have lost a great amount of value, and if the customer has other offsetting capital gains - so this is a very rare event. However, it is a tested item on the exam!

Pension funds are prohibited from using which investment strategy?

Sell short government and agency securities Pension funds and all retirement plans cannot trade on margin; only cash accounts (fully paid positions) are permitted. They can buy securities fully paid, can buy puts on fully paid positions and can sell calls against fully paid positions for premium income. They cannot buy securities on margin, cannot sell short and cannot sell naked calls or puts, because all these are margin transactions.

Under the provisions of ERISA (Employee Retirement Income Security Act), the use of index options is:

allowed only if the strategies followed are in compliance with the objectives and restrictions of the plan Index options can be a useful tool for portfolio managers to hedge in a declining market (by purchasing index puts) or to enhance income from the portfolio (by writing index calls). ERISA does not prohibit their use in portfolios that fund retirement plans. However, any strategies that are used must be in compliance with any restrictions set in the plan documents.

The CEO of a company is the trustee of that company's 401(k) Plan. The CEO wants to take a loan from the 401(k) and use the proceeds to make a capital investment in the company. The plan fiduciary:

cannot allow the transaction because it is prohibited under ERISA ERISA prohibits certain transactions between qualified plans and "interested persons" (trustees, fiduciaries, plan service providers, officers and directors of the company that sponsor the plan, etc.). These prohibited transactions include the: sale or lease of property to the plan; lending of money; furnishing of goods and services to the plan. The CEO cannot borrow money from the plan - the transaction is prohibited. Also note that if the CEO were a plan participant, the CEO could borrow money from his or her 401(k) on the same terms and conditions as any other plan participant - but this is not what the question is about!

A 403(b) Plan can invest in all of the following EXCEPT:

certificates of deposit 403(b) Plans are more limited in their permitted investments than other types of retirement plans. These are salary reduction retirement plans for the not-for-profit sector, such as school systems universities, hospitals, etc. The basic "idea" is that the plan participants (school teachers, professors, nurses, doctors) know nothing about how to manage their money and need professional management. The only permitted investments are annuity contracts (both fixed and variable) and mutual fund purchases. All of these have a professional manager. Self-directed investments in individual stocks or CDs are not permitted.

Distributions from an IRA may be taken prior to age 59 1/2 without penalty for all of the following reasons EXCEPT:

child care expenses Prior to age 59 1/2, funds can be withdrawn from a Traditional IRA without penalty if a person dies, is disabled, to pay for qualified first time home purchase expenses (there are limitations on this), and to pay for qualified education expenses (there are limitations on this as well).

If a defined benefit plan is terminated due to the bankruptcy of the company, any unfunded pension liability is:

covered by PBGC Pension Benefit Guaranty Corporation provides insurance for defined benefit plans formed under ERISA that are terminated (typically due to the closing of a company) that have an unfunded pension liability. Note that PBGC only covers defined benefit plans; it does not cover defined contribution plans (where an annual contribution is made to a separate account for each employee and the employee decides on the investments to be made).

A 401(k) plan is established by a:

for-profit corporation with contributions made by employees as a salary reduction 401(k) plans are salary reduction qualified retirement plans established by for-profit employers such as corporations and partnerships for their employees. The maximum contribution is $19,500 (in the year 2020). In contrast, 403(b) plans are similar salary reduction plans but are established by not-for-profit employers such as universities and hospitals.

The "IPS" (Investment Policy Statement) for a qualified retirement plan under ERISA states the asset allocations permitted in the plan. The IPS requires that 50% of assets be placed in stocks; and 50% of assets be placed in fixed income securities. The allocation percentage is allowed to vary by up to 10%, giving the manager the ability to time the market to enhance returns. The investment manager expects a bull market in equities and increases the equities allocation to 65% and reduces the fixed income allocation to 35%. The equities market rallies and the overall portfolio increases by 18% for the year. At the end of the year, the manager rebalances, bringing the portfolio allocation back to 50/50. The investment manager:

has violated his fiduciary obligation to the plan beneficiaries by not following the guidelines of the IPS Yes, the plan manager made money; however he could have lost a lot of money as well! The manager did not follow the IPS, which permitted him to increase the equities allocation to 60%; but not to 65%. He has violated his fiduciary obligation to the plan beneficiaries. Review

Under ERISA Rule 404(c), a 401(k) plan fiduciary would be relieved from liability resulting from the plan participant's investment directions:

if the plan offers investment options consisting of a Fixed Income Fund, Growth Fund and a Capital Preservation Fund Rule 404(c) permits a 401(k) plan to offer investment options to its participants. It requires that the plan sponsor offer at least 3 investment alternatives that are diversified; that have materially different risk and return characteristics; and that when combined with each other, tend to minimize risk through diversification (e.g., an equity fund, a fixed income fund, and a capital preservation fund). This is the case with Choice C. Choice D does not offer an equity fund. If the plan complies with Rule 404(c), the plan fiduciary cannot be sued for "breach of fiduciary duty" by the plan participants based upon the plan participant making poor choices among those offered (e.g., a young plan participant putting all of his or her money in a money market fund for a long time frame or an older plan participant putting all his money in a growth fund just before a bear market). However, the plan fiduciary can still be sued for breach of fiduciary duty if the investment choices offered are imprudently selected (e.g., they have very high expenses and poor performance, as compared to other funds of the same type).

Money purchase retirement plans have:

mandatory employer contributions Money purchase retirement plans are a type of defined contribution plan that require the employer to contribute a fixed percentage of each employee's salary to the plan each year - regardless of whether the employer is profitable or not. For example, the plan can require that 3% of each employee's salary be contributed by the employer to the plan. This mandatory contribution is tax deductible to the employer.

An employer would set up a defined benefit plan for 15 or more employees in order to:

maximize plan participation In a defined benefit (DB) plan, every employee that is full time, age 21 with at least 1 year of service, is included at the employer's expense. In a defined contribution (DC) plan, most of which are salary reduction plans, the employee contributes a portion of his or her salary and this amount is deductible to the employee (for example, a 401(k) plan is a salary reduction DC plan). In a DC plan, the employee can choose to participate, or may choose not to participate, each year. Thus, DB plans maximize employee participation, since all eligible employees are included in the plan, at the employer's expense. One could argue that Choice A is also good, since employer managed DB plans tend to be broadly diversified, whereas salary reduction DC plan investments are chosen by the employee who may, or may not, fully diversify his or her portfolio. However, Choice B is better. Because salary reduction DC plans allow employees to make investment decisions, these plans shift investment risk to the employee. In contrast, DB plans keep investment risk with the employer, since the plan must pay the "defined benefit" at retirement, regardless of the performance of the portfolio funding the plan.

A "top heavy" retirement plan is:

permitted under ERISA rules and contributions are not tax deductible Under ERISA, a "top heavy" retirement plan is one that disproportionately favors upper level employees by giving them excessive retirement benefits that are not available to lower level employees. If a plan is deemed to be "top heavy," then the contributions will not be tax deductible, making the plan non-tax qualified.

ERISA requirements regarding the investments that are suitable for a retirement account stress:

safety of principal ERISA rules regarding retirement plans stress that investments should be "safe."

An individual who works for a corporation is terminated at age 56. He is finding it hard to get another job and wants to use funds in his 401(k) to pay for living expenses. Any distributions from the 401(k) will be:

subject to ordinary income tax only if installments are taken over the individual's life expectancy A little known rule for both 401(k) and 403(b) plans is that if an employee quits or is terminated between the ages of 55 to 59 1/2, the "Rule of 55" can be applied. This IRS rule allows the terminated employee to take payments in equal installments over his or her life expectancy and avoid the 10% penalty tax. Note that regular income tax must still be paid.

A 25-year old single customer earns $70,000 per year at a corporation. He contributes the maximum amount to his company's 401(k) plan and wants to put money aside on a tax-deferred basis for the 1st time purchase of a house in 7 years. During that time, the customer contributes to a Roth IRA. If a $10,000 distribution is taken after 3 years for a 1st time home purchase, it will be:

subject to tax on any portion of the distribution attributable to earnings in the account but not to the 10% penalty tax The first $10,000 of 1st time home purchase expenses can be withdrawn from an IRA prior to age 59 1/2 without having to pay the 10% penalty tax. However, regular income tax may still be due. The rules lay out as follows: Early Withdrawal From 10% Penalty? Income Tax Due? Tax-Deductible IRA No Yes Non-Tax-Deductible IRA No. On Earnings Only Roth IRA < 5 Years Old No On Earnings Only Roth IRA > 5 Years Old No No He is below the income phase-out range for a Roth, so he can contribute. As long as funds are held in a Roth for at least 5 years, and the withdrawal prior to age 59 1/2 is made for a "qualifying reason" (which is the case here), there is no tax due. However, the key to this question is that the individual withdraws from the account after only 3 years. Thus, the withdrawal is subject to tax, but only the portion represented by earnings. The portion represented by the original contribution was not deductible, and can be withdrawn tax-free (as long as it has been in the account for 5 years).

When taken at retirement, withdrawals from a 401(k) plan are:

taxable at ordinary income tax rates on amounts attributable to both employer and employee contributions and build-up on those contributions Distributions from a 401(k) plan are 100% taxable as ordinary income in the year received.

Funds withdrawn from an IRA after age 59 1/2 are:

taxed at ordinary income tax rates Funds withdrawn from a Traditional IRA are taxed at ordinary income tax rates. If non-deductible contributions are made (which only occurs if an individual is not covered by another qualified retirement plan and he or she earns too much), then the tax is applied only to the build-up in the account - there would be no tax on the distribution amount that equaled the original non-deductible contribution. Choice A is incorrect because to maintain tax-free status, the rollover must be completed in 60 days - not 90 days.

Employees of a company are eligible to participate in their company's 401(k) plan. The plan elects to comply with ERISA Rule 404(c). In order to do so, the sponsor MUST offer plan participants different investment options:

that allow for portfolio diversification and that can be changed by plan participants ERISA Rule 404(c) allows plan fiduciaries to be relieved of potential liability for investment losses if they offer plan participants a minimum of 3 investment options, that when put together, tend to offer diversification and reduce risk. The plan fiduciary typically does this by offering different fund investments, which can either be actively managed (higher expenses but potentially higher returns) or passively managed (lower expenses but invested in index funds). The actual dollar amount invested in each fund is chosen by the plan participant and the plan participant must be able to shift investments between the options offered at least every 3 months. Thus, the responsibility for portfolio rebalancing is put on the plan participant, not the plan fiduciary.

The maximum contribution that an individual who earns $1,000 per year can make to an IRA in 2020 is:

$1,000 For the year 2020, the maximum individual contribution to an IRA is the lesser of 100% of income or $6,000. Since this person earns $1,000, the maximum permitted contribution is $1,000.

Which statement is FALSE about a non-working spouse collecting social security benefits?

A non-working spouse can only claim a benefit for hardship or disability Even if a spouse has never worked, he or she is entitled to a social security benefit equal to 50% of the amount that would be paid to the working spouse. The taking of the benefit does not reduce the benefit that will be paid to the working spouse at retirement. The benefit paid to a non-working spouse cannot be claimed until age 62 or later.

When can a divorced wife receive social security benefits based on her ex-husband's earnings record?

Another fact that must be known for the exam is that a divorced individual can collect social security benefits based on his or her ex-spouse's earnings record if certain tests are met. This covers a situation such as one where a wife gave up work to raise the kids, and then the couple divorced when the kids were grown. If the marriage lasted 10 years; the ex-wife is currently single; and the ex-wife is at least age 62; she can claim social security benefits based on her ex-husband's earnings record (typically she will get a benefit equal to 50% of his).

Which of the following statements are TRUE regarding tax sheltered annuities for employees of non-profit organizations? I These are known as 401(k) plans II These are known as 403(b) plans III Contribution to the plan are excluded from taxable income IV Contributions to the plan are included in taxable income

II and III Tax deferred annuities for employees of non-profit organizations are 403(b) plans. These retirement plans are for employees of non-profit institutions such as hospitals and universities. Contributions are excluded from taxable income, and must be used to purchase "tax sheltered" annuities or mutual funds.

A person must begin to make withdrawals from an IRA:

by April 1st of the year following the year the individual reaches age 72 Distributions from an Individual Retirement Account must commence by April 1st of the year following that person reaching age 72.

An individual who is recently deceased has listed the following assets: $250,000 Fully-paid residence $600,000 Investment portfolio $150,000 Life insurance policy - son named as beneficiary What amount is included in this individual's gross estate?

$1,000,000 Securities owned are included in the deceased's gross estate. Any real property that is owned by the decedent is included in the estate (the amount included is the equity in the real estate, if there is a mortgage against the property). Regarding life insurance proceeds, if the policy is owned by the deceased individual, then it is included in the decedent's estate. It makes no difference who is named as the beneficiary on the policy. Note that if the insurance policy is owned by someone else (such as the spouse of the decedent or held in a non-revocable trust), then it is excluded from the estate of the decedent - since it is deemed to be an asset that is owned by that other person (the spouse or the trust).

How many quarters must an individual work to be eligible for retirement benefits?

40 To be eligible for social security benefits, an individual must have worked at least 40 calendar quarters (10 years).

What type of employee benefit plan given to executives has no limit on the amount of contribution that can be made annually?

Deferred compensation plan Deferred compensation plans can be established by corporate employers, allowing top-level employees who are high earners to defer taking all of their income, reducing current tax liability. The deferred amount is specified in the agreement between the company and the executive, is recorded on the company's books and earns a rate of return tied to a benchmark index, like the S&P 500 Index. Note that there is no limit on the amount that can be deferred under these plans, since the contribution amount is established by private agreement. When the employee retires, the deferred compensation amount plus growth is paid out as specified in the agreement and is taxable. Such plans are discriminatory, because they are only offered to high-earning top level employees, so these plans are not subject to ERISA. In contrast, a 457 plan is an additional salary reduction compensation plan offered to executives of governmental and not-for-profit employers where the dollar contribution is limited ($19,500 in 2020). A 401(k) plan is a corporate sponsored salary reduction plan, with the same contribution limit as a 457 plan. Roth IRAs have a maximum contribution of $6,000 in 2020.

Which of the following qualify as a 501(c)(3) organization that can establish a 403(b) plan? I Non-profit hospital II Church III Religious school IV Publicly-held company

I, II, and III only Only organizations that are not-for-profit entities, such as non-profit hospitals, charities, churches, and religious schools, qualify as 501(c)(3) organizations.

Which of the following statements about 403(b) plans are TRUE? I Contributions are tax deductible to the employee II Employees of any organization can contribute to this type of plan III Employees make voluntary contributions through their employers IV Earnings on contributions by employees are tax deferred

I, III and IV 403(b) plans are only available to non-profit organization employees, such as school and hospital employees. These are tax qualified annuity plans, where contributions made by employees are tax deductible. Earnings in the plan grow tax deferred. When the employee retires, he or she may take the annuity, which is 100% taxable as ordinary income.

Which of the following are included in the gross estate of a deceased person for estate tax purposes? I Roth IRA II Life Insurance on the decedent owned by a spouse III Revocable Trust IV Non-Revocable Trust

I and III All IRA assets are included in one's gross estate - it makes no difference if it is a Traditional IRA or a Roth IRA. Revocable trust assets are also included in one's gross estate. Since the grantor retains control over the trust assets, it is deemed to still be the property of the grantor. On the other hand, the grantor in a non-revocable trust gives up control of the assets when these are transferred to the trust. These assets are excluded from the gross estate of the grantor and any income is taxable to the trust. Finally, regarding life insurance proceeds, if the policy is owned by someone else (such as the spouse of the decedent or held in a non-revocable trust), then it is excluded from the estate of the decedent - since it is deemed to be an asset that is owned by that other person (the spouse or the trust).

Which of the following MUST act in a fiduciary capacity? I Securities agent II Investment adviser representative III Executor of an estate IV Settlor of a pension plan

II and III only Investment advisers have a fiduciary obligation to their customers. They must always act in the customer's best interests and must always take the same side of a trade as the customer. It is for this reason that if an investment adviser recommends a security to a customer, it cannot be the seller of the security to the customer. In contrast, an agent of a broker-dealer is only obligated to recommend a security that is "suitable" and can take the other side of the trade. Executors of estates and trustees are, by definition, fiduciaries. Settlors of trusts and pension plans are not fiduciaries. The settlor of a trust is the grantor who establishes the trust. The settlor of a pension plan is a business executive who makes business decisions for the plan.

Which statements are TRUE? I Traditional 401(k) plans require mandatory annual employer matching contributions II Safe harbor 401(k) plans require mandatory annual employer matching contributions III Traditional 401(k) plans require 100% vesting of employer-paid benefits IV Safe harbor 401(k) plans require 100% vesting of employer-paid benefits

II and IV A safe harbor 401(k) relieves the employer of having to perform annual benefits testing to show that the plan does not favor highly compensated employees (a so-called "top-heavy" plan). To get the safe harbor, the employer must agree to make annual matching payments into the plan of either 4% of salary of participating employees or 3% of salary of all eligible employees (it is not mandatory that each eligible employee participate). These employer-paid benefits must 100% vest immediately.In contrast, in a Traditional 401(k), the employer can choose whether to make matching contributions and these can vest over a number of years (typically 5 years). Also, in a traditional 401(k), the employer must complete an annual "top heavy" benefits test.

Which of the following MUST act in a fiduciary capacity? I CEO of a company who decides company's matching contribution level in its 401(k) plan II A securities agent who recommends an investment to a client III An investment adviser who prepares financial plans on a "fee only" basis IV A lawyer who is appointed as executor over the estate of a person that is deceased

III and IV only Investment advisers have a fiduciary obligation to their customers. They must always act in the customer's best interests and must always take the same side of a trade as the customer. It is for this reason that if an investment adviser recommends a security to a customer, it cannot be the seller of the security to the customer. In contrast, an agent of a broker-dealer is only obligated to recommend a security that is "suitable" and can take the other side of the trade. Executors of estates and trustees are, by definition, fiduciaries. The CEO deciding the matching contribution level for the company's 401(k) plan is making a business decision and is a plan settlor. He or she is not acting as a fiduciary to the plan. Plan fiduciaries are persons who control, or have discretionary authority, over plan assets.

A customer has an IRA account that holds the following: Certificates of Deposit Equities REITs Municipal Bonds Which of these investments should be discussed with the customer?

Municipal Bonds Municipal bonds are already tax-free, and because of this their yield is lower. Because an IRA is a "tax-deferred envelope," only higher yielding taxable bonds should be held there - not municipal bonds. Remember that there is no tax on the annual income or growth on investment held in an IRA - tax is only due when funds are withdrawn.

All of the following are acceptable investments in an Individual Retirement Account EXCEPT:

Municipal Bonds U.S. Minted gold coins can be held as an investment in an IRA account, as can gold and silver bullion (however, the long term merits of such an investment can be debated). All securities can be purchased, including stock options. Also, real estate and mortgage investments are permitted. The purchase of a tax-exempt security is absolutely inappropriate. Because of their tax benefit, these investments offer a lower return than taxable investments. Because the IRA account itself is a "tax-deferred" envelope, the appropriate investments are those that give the highest return (for the level of risk assumed), which will build value tax-deferred.

Which of the following is covered by ERISA?

Private employee pension plans ERISA (Employee Retirement Income Security Act) protects employees in the "private" sector that are covered by employer sponsored pension plans from having their pension benefit reduced or taken away by employer mismanagement of the pension assets. It does not cover public sector (government) retirement plans, since we trust our government more than we trust corporations. It does not apply to Individual Retirement Accounts, since the establishment of these, and the management of the assets in the account, is decided by the beneficiary. ERISA does not apply to Medical Savings Accounts, which are a type of account permitted under the tax code that allows a tax deductible contribution to pay routine medical expenses for persons who are covered by a high deductible medical insurance policy. These are not covered under ERISA because they do not provide a retirement benefit.

A 25-year old single customer earns $80,000 per year at a corporation. He contributes the maximum amount to his company's 401(k) plan and wants to put money aside on a tax-deferred basis for the 1st time purchase of a house in 6 years. The best recommendation is that this individual make contributions to a:

Roth IRA Coverdell ESAs and 529 plans are used to pay education expenses and offer no benefit when buying a home. The first $10,000 of 1st time home purchase expenses can be withdrawn from an IRA prior to age 59 1/2 without having to pay the 10% penalty tax. However, regular income tax is still due. The rules lay out as follows: Early Withdrawal From 10% Penalty? Income Tax Due? Tax-Deductible IRA No Yes Non-Tax-Deductible IRA No. On Earnings Only Roth IRA < 5 Years Old No On Earnings Only Roth IRA > 5 Years Old No No The key to this question is that the individual wants to buy a house in 6 years. He is below the income phase-out range for a Roth, so he can contribute. As long as funds are held in a Roth for at least 5 years, and the withdrawal prior to age 59 1/2 is made for a "qualifying reason" (which is the case here), there is no tax due. If the contribution was made to a Traditional IRA, because this person earns $80,000 per year and is covered by another qualified plan, it would be a non-deductible contribution (it is above the $75,000 income limit for a deductible contribution in 2020). In that case, the $10,000 withdrawn would be subject to tax on any amount attributable to earnings in the account. This is a very picky question!

An investor has $10,000 invested in an account that earns 5% annually. The investor wishes to withdraw $2,000 per year. If the investor withdraws $2,000 annually, the account will be fully depleted in:

Since an advanced function calculator is not provided in the exam, the answer to this question must be approximated manually. YearBeginningBal.Interest@ 5%WithdrawalEndingBal.1 $10,000 ... $10,500 - $2,000 = $8,5002 $8,500 ... $8,925 - $2,000 = $6,9253 $6,925 ... $7,271 - $2,000 = $5,2714 $5,271 ... $5,535 - $2,000 = $3,5355 $3,535 ... $3,712 - $2,000 = $1,7126 $1,712 .. $1,797 = $1,797 = $0 Another way to deal with this is the "eyeball" approach. If $10,000 is invested at no interest and $2,000 is withdrawn each year, it would take $10,000/$2,000 = 5 years to deplete the money. The average balance over this time frame is $5,000 (starting balance is $10,000 and ending balance is 0) x 5% interest = $250 annual interest earned x 5 years = $1,250 interest earned total. Thus, there is a total of about $11,250 being depleted at the rate of $2,000 per year = about 5.6 years to deplete the balance. 6 years is the closest answer to this.

Which statement is TRUE about a 457 Plan?

There is no 10% penalty for withdrawing funds prior to age 59 ½ 457 plans are "add on" plans to government sponsored defined benefit plans and 403(b) plans. 403(b) plans are similar to 401(k)s - they are salary reduction plans that allow employees to contribute up to $19,500 in 2020. 401(k)s are for the corporate sector, while 403(b)s are for the not-for-profit government sector. As an added benefit for higher level employees, not-for profit employers can establish a 457 plan. This is not a qualified plan because it is discriminatory. An additional $19,500 can be contributed in 2020 as a salary reduction by these higher level employees. A key difference between 457 plans and either a 403(b) or 401(k) is that funds can be taken out of a 457 at any time without incurring a 10% penalty tax (though regular income tax will be due). This is permitted because very often the participants in 457 plans are police officers and firemen who might have to retire earlier than age 59 ½ due to disability - so they can get the funds in the 457 account to help pay for needs caused by forced early retirement without paying the 10% penalty tax.

A husband and wife are getting divorced. The husband has a 401(k) at his company with a $200,000 balance. The wife has been a homemaker, taking care of their 3 children. When may the wife receive her portion of the 401(k) in the divorce settlement?

When the QDRO is issued A QDRO (Qualified Domestic Relations Order) is a court order in a divorce or separation agreement that divides the assets of an ERISA pension plan (which can only be in 1 person's name) among an "alternate payee" or "alternate payees." The actual division of the retirement account value is based on whether the account was established before or after the marriage. If it was established after the marriage, then the plan assets are generally split 50/50. If the retirement account was established before the marriage, then the division is based on the asset increases that took place after the date of marriage.

In order to comply with the requirements of ERISA Rule 404(c), a qualified retirement plan that offers participant-directed investments is:

required to offer at least 3 diversified investment alternatives that have materially different return and risk characteristics ERISA Rule 404(c) applies to retirement plans that offer "self-directed" investment, such as 401(k) plan. It requires that the plan sponsor offer: at least 3 investment alternatives that are diversified; that have materially different risk and return characteristics; and that when combined with each other, tend to minimize risk through diversification (e.g., an equity fund, a fixed income fund, and a capital preservation fund); participants the opportunity to diversify their accounts sufficiently to avoid large losses; and participants the opportunity to change investments with a frequency appropriate to the volatility of the investments. Note that the sponsor can offer its own stock as an asset class (e.g., an employee of GE can be offered GE stock as an investment option), as long as the stock is publicly traded and the participant gets the voting rights.