CFP - Retirement Planning - Chapter 12 - Fiduciary Responsibility

Which of the following statements concerning the ERISA 404(c) participant-directed individual account plan exception is (are) correct? I. The exemption means that the fiduciaries are not responsible for the investment alternatives available to plan participants. II. The fiduciary relief can not apply to an individual who fails to make affirmative investment elections. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

The answer is (D). I is incorrect because the fiduciaries remain responsible for the investment alternatives that they choose to include in the plan. II is incorrect because there is an exception to the general rule that the participant must make an affirmative election if the assets are invested in a qualified default investment alternative and certain disclosure requirements are satisfied. (Chapter 12)

What is the exclusive-benefit rule?

The exclusive benefit rule applies to all tax-sheltered retirement plans and is stated in IRC section 401(a) for employer plans and section 408(a) for IRA plans. This rule stipulates that all activities of the plan must be for the exclusive benefit of the plan beneficiaries.

What is IRC section 404(c)?

The general rule is that ERISA plan fiduciaries are liable for all aspects of selection and monitoring of plan investments and are on the hook for any participant claims for fiduciary breaches should something go wrong. At the most basic level, to be 404(c) compliant, a DC plan must offer a broad range of investment options and make it possible for participants to easily view and control their investments. 404(c) is a limited exception to this general rule. It only applies to individual account plans (including ERISA 403(b) and 401(a)/(k) plans, but not 457(b) plans, which are not subject to the fiduciary provisions of ERISA) where participants can direct investment of their accounts. If the ERISA plan satisfies 404(c), fiduciaries would not be liable for any claim of a breach related to a participant's selection of investments. However, since this is an exception, and not a rule, plan fiduciaries remain liable for the selection and monitoring of all investment options made available to the participant. For example, let's say a participant, ignoring the principles of proper diversification, invests all of his assets in a plan's emerging markets fund. The fund loses nearly half of its value in one year. The participant cannot make a claim for fiduciary breach related to his/her selection of the emerging markets fund, unless he can successfully claim that 404(c) was not properly followed by the plan. However, the participant could make a claim of a fiduciary breach in relation to the plan offering this particular emerging markets fund on its investment menu in the first place, if the selection and monitoring of the fund was imprudent. Thus, the protection from fiduciary liability offered under 404(c) is quite limited. Source: https://cammackretirement.com/knowledge-center/insights/the-top-five-things-you-need-to-know-about-erisa-404c

A fiduciary is personally liable for any losses due to a breach in duty and can be liable for a breach by a co-fiduciary as well. T/F?

True.

A fiduciary who uses plan assets for his or her own interest has engaged in a prohibited transaction. T/F?

True.

A plan that has lent money to the sponsoring company has most likely engaged in a prohibited transaction. T/F?

True.

A trustee who invests plan assets in an excellent company that is also a client of the plan's sponsor may have violated the exclusive-benefit rule. T/F?

True.

An employer may protect employees acting as plan fiduciaries by either indemnifying employees or purchasing liability insurance. T/F?

True.

ERISA 404(c) does not relieve plan fiduciaries of the responsibility of selecting prudent investment options from which participants may choose. T/F?

True.

A fiduciary is not eligible for ERISA 404(c) protection in the case of a participant who has been enrolled automatically and fails to provide specific investment direction. T/F?

False. The fiduciary may be eligible for ERISA 404(c) protection, as long as the plan satisfies specific requirements

If a court were evaluating the performance of a business owner acting as trustee, the trustee would be compared to other business owners in the same role. T/F?

False. The prudent investment requirement states that a trustee will be measured against "a person acting in a like capacity and familiar with such aims." This implies that the person's actions will be measured against those of professional trustees.

Requirements for obtaining relief from fiduciary responsibility under the Department of Labor's self-directed account plan regulations include which of the following? I. Participants must be notified that plan fiduciaries are seeking to limit their liability by following the regulations. II. The plan must offer at least six investment options. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

The answer is (A). II is incorrect because a plan only has to offer three investment options. (Chapter 12)

Which of the following statements concerning the prohibited transaction rules is (are) correct? I. A sale of an investment to the plan from a party in interest is a prohibited transaction unless it is exempted by a statutory, administrative, or individual exemption. II. The plan's attorney is not a party in interest. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

The answer is (A). II is incorrect because all service providers to the plan, including an attorney, are considered parties in interest. (Chapter 12)

Which of the following statements regarding fiduciary responsibility is correct? (A) Individuals who sell investments to the plan usually are considered fiduciaries. (B) The exclusive-benefit rule requires that fiduciaries discharge their duties solely in the interest of the plan's participants and beneficiaries for the exclusive purpose of providing benefits and defraying reasonable expenses. (C) Fiduciaries must only act prudently when they are choosing risky investments. (D) A fiduciary can select an investment that benefits the fiduciary, as long as the investment is prudent.

The answer is (B). (A) is incorrect because individuals who sell investments to the plan are fiduciaries only if they have discretionary control over plan investments or provide investment advice on a regular basis. (C) is incorrect because fiduciaries must act prudently at all times. (D) is incorrect because it describes behavior that would most likely constitute prohibited self-dealing. (Chapter 12)

Which of the following statements concerning the scope of the ERISA fiduciary rules is (are) correct? I. Decisions made by the employer to establish or terminate the plan are business decisions and are not fiduciary actions. II. ERISA generally exempts plans that only cover the 100 percent owner of an entity. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

The answer is (C). Both I and II are correct. (Chapter 12)

Jane Johnson is a 70-percent owner of QRS Corporation, a small closely held business with a 401(k) plan. Which of the following plan transactions is (are) a prohibited transaction? I. The plan purchases or leases property from Jane. II. The plan lends money to QRS Corporation. (A) I only (B) II only (C) Both I and II (D) Neither I nor II

The answer is (C). Both I and II are prohibited transactions. (Chapter 12)

Which of the following statements concerning the application of ERISA fiduciary rules is correct? A) Fiduciaries are required to discharge their duties primarily in the interest of the plan's sponsor. (B) Plan trustees have a fiduciary relationship to the plan sponsor. (C) As long as a plan offers individual investment options to its participants, the fiduciary cannot be held liable for losses that arise from such participant discretion. (D) A fiduciary may not only be personally liable to the plan for losses that result from his or her breach of duty, but may also be liable for the acts of cofiduciaries.

The answer is (D). (A) is incorrect because fiduciaries are required to discharge their duties in the interest of the plan's participants and beneficiaries. (B) is incorrect because plan trustees have a fiduciary relationship only to the plan participants and not to the plan sponsor. (C) is incorrect because, if a plan offers individual investment options to the participants, the fiduciary can still be held liable for losses that arise from such participant discretion, unless the plan conforms with all of the strict Department of Labor requirements that include not only a general rule, but also seven specific rules related to investment options. (Chapter 12)

Which of the following statements concerning the fee disclosure rules that apply to service providers is correct? (A) The rules apply to SEPs and SIMPLEs. (B) The rules only require that service providers report direct compensation. (C) If the rules are not followed the service providers are charged a $1,000 fine. (D) The rules apply to those providing brokerage services to a 401(k) plan with participant-directed accounts.

The answer is (D). (A) is incorrect because the fee disclosure rules do not apply to SEPs and SIMPLEs. (B) is incorrect because covered service providers must disclose both direct and indirect compensation. (C) is incorrect because if the rules are not followed the fiduciary has engaged in a prohibited transaction and the service provider can be subject to a penalty tax, which is 15 percent of the amount involved. (Chapter 12)

Once a participant in a 401(k) plan has earned an amount subject to a salary deferral election it is treated as a plan asset, and has to be segregated from the employer's assets within a reasonable period of time. T/F?

True.

One of the fiduciary's obligations is to operate the plan in accordance with the trust and other instruments governing the plan. T/F?

True.

Participants must be notified that plan fiduciaries are seeking the fiduciary relief provided in ERISA 404(c). T/F?

True.

What actions would result in fiduciary status?

- Having discretionary authority in the administration. - Exercising control over the management of the plan or disposition of the plan's assets. - Rendering investment advice for a fee.

The employer's decision to terminate a qualified plan has to satisfy a fiduciary standard. T/F?

False. Certain decisions by the employer like the decision to set up or terminate a plan are considered settlor functions not subject to scrutiny under the fiduciary rules.

One of the requirements for obtaining relief under the ERISA 404(c) individual account plan exception is that participants must be given the option to choose from among five different investment options. T/F?

False. Participants have to be able to select from only three investment options for the fiduciaries to be eligible for relief under the ERISA 404(c) rules.

A financial advisor whose sole role is providing investment education to employees is always considered a plan fiduciary. T/F?

False. Recent DOL regulations clearly identify that providing investment education is not a fiduciary role.

Prohibited transactions are uncommon in the small-business market. T/F?

False. Small-business owners sometimes forget that plan assets cannot be used for the benefit of the company and/or as personal assets. The entrepreneurial owner wants to put the pension assets to work. It is important, therefore, for knowledgeable advisors to look for prohibited-transaction problems.

An individual investment advice program satisfies the prohibited transaction exemption only if the advice is based on a computer-generated model. T/F?

False. The advice can also be from an advisor as long as fees do not vary depending on the investment option selected.

The financial advisor who has not agreed to be a qualified plan fiduciary will not be considered one, even if the advisor exercises discretionary control over the purchase of plan investments. T/F?

False. The determination of fiduciary status is based on the facts and circumstances of the situation. Furthermore, exercising discretionary control over plan investment purchases is a role that results in fiduciary status.