Module 1 (CRPS)

Which one of the following is accurate about a "party in interest"?

=A) A party in interest is prohibited from entering into certain transactions with a qualified plan. B) A party in interest cannot also be classified as a disqualified person. C) A party in interest is prohibited from any dealings with the plan or its participants. D) A party in interest is exempt from any fiduciary liability. Explanation A party in interest, per the DOL, is any person prohibited by ERISA from entering into certain transactions with a qualified plan. As a practical matter, a party in interest is almost anyone who has a relationship with the plan. The Internal Revenue Code uses the term "disqualified person" rather than "party in interest." LO 1-2

Which one of the following is not required to comply with ERISA Section 404(c), which makes all retirement plan fiduciaries potentially liable?

=A) Fiduciaries must make sure that an investment policy statement (IPS) is in place for the plan. B) Fiduciaries must make sure at least three investment options are offered and that they are broadly diversified. C) Fiduciaries must make sure that proper disclosures are made to plan participants. D) Fiduciaries must be prudent and make sure investment fees are reasonable. Explanation An IPS is an excellent tool for management of fund assets; however, it is not a legal requirement. All of the other choices are required. LO 1-2

An investment professional who reads investment journals is complying with the

=A) duty to keep current. B) duty to diagnose. C) duty to consult. D) duty of loyalty. Explanation The duty to keep current requires an investment professional to be up to date with subjects relating to his or her job. LO 1-2

ERISA administration is divided among all of the following government agencies except the

=A)SEC. B)PBGC. C)DOL. D)IRS. Explanation ERISA administration is divided among the Department of Labor (DOL), the Internal Revenue Service of the Department of the Treasury (IRS), and the Pension Benefit Guaranty Corporation (PBGC). The SEC regulates investment advisers, but not ERISA administration. LO 1-1

The primary reason that ERISA was passed into law was to protect

A) participants in defined benefit plans only. =B) participants in company sponsored retirement plans. C) all retirement savers and investors. D) retirement plan sponsors from lawsuits. Explanation ERISA was passed primarily to provide certain protections to plan participants in company-sponsored retirement plans, which can be defined benefit or defined contribution plans. LO 1-1

If the role of the plan administrator is not delegated, ERISA will presume that it is the

A) trustee. B) TPA. =C) plan sponsor. D) investment manager. Explanation ERISA will assume that the plan sponsor (the employer) is the plan administrator unless another party is named. LO 1-2

Under ERISA, being a co-fiduciary means that

=A) a fiduciary who is responsible for one aspect of the retirement plan can be held liable for the actions of another fiduciary of the plan. B) special approval must be obtained from the Department of Labor to have co-fiduciaries. C) there has been an ERISA violation since co-fiduciaries and delegation of responsibilities is not allowed. D) when there is more than one fiduciary, each fiduciary is only responsible and liable for their own designated responsibilities. Explanation ERISA's co-fiduciary rules mean that a plan fiduciary can be held liable for the actions of another plan fiduciary, even if the function where the breach occurred does not fall under their responsibilities. This can happen when a fiduciary knows about a breach of another fiduciary yet does nothing to remedy it. LO 1-2

Which one of the following is not one of the six major duties that a fiduciary owes to his or her client?

=A) integrity B) care C) disclosure D) loyalty Explanation The six major duties are duty of loyalty, duty of care, duty to disclose, duty to diagnose, duty to consult, and duty to keep current. One should act with integrity when carrying out any of the fiduciary duties, but integrity in and of itself is not a "duty." LO 1-2

Which of the following would not be considered a fiduciary function of a 3(16) plan administrator?

=A) preparing drafts of government filings B) acting to enforce terms of the plan C) authorizing a plan loan to a participant D) providing investment services for a fee Explanation Preparing drafts of government filings would be considered administrative. Authorizing a loan, providing investment services for a fee, and taking action to enforce terms of the plan would all be examples of discretion and control, and would be considered fiduciary functions. LO 1-2

All of the following are potential red flags regarding the reasonableness of retirement plan fees except

=A) using a mutual fund that has only one share class B) revenue sharing arrangement between the fund and administrator C) high initial or recurring fees D) use of proprietary funds of a fund provider Explanation Using a higher fee share class when a lower fee share class is available for the same fund would be a concern. However, using a mutual fund where there is only one share class in and of itself does not raise a red flag. Like any investment in a retirement plan, it should be evaluated to make sure any fees it charges are reasonable. LO 1-2

What is the estimated annual cost of conflicted advice according to the 2015 White House report?

A) 0.5% =B) 1.0% C) 1.5% D) 0.2% Explanation The annual cost of conflicted advice is about 1% a year, according to the White House report. Various sources have disputed this amount, but the general consensus is that there are retirement investors paying too much in fees, which can significantly impact the value of their nest eggs when they retire. LO 1-3

What is the maximum length of a vesting schedule allowed for a defined benefit pension plan?

A) 6 years B) 5 years =C) 7 years D) 3 years Explanation The maximum vesting schedule allowed for a defined benefit plan (that is not top-heavy) is 3- to 7-year graded. LO 1-1

Which one of the following individuals would not be held to the fiduciary standard?

A) A plan administrator with discretionary management and control over the administration of the plan. B) An adviser providing personalized investment advice to a qualified plan on an ongoing basis. C) A registered investment adviser managing a brokerage account. =D) A registered representative providing guidance on selecting stocks for a portfolio. Explanation The registered representative would be held to the suitability standard, and is not considered a fiduciary. LO 1-3

Which of the following statements regarding the public's level of trust when working with the financial services industry is correct?

A) According to a Pershing study, the financial services industry is more concerned about trust than investors. =B) Despite the overall stock market recovery since the market meltdown in 2008, trust levels of financial services remain low. C) The Edelman Trust Barometer consistently ranks financial services as one of the most trusted sectors in our economy. D) Trust levels in the financial services industry remain low despite clearly understood job titles and functions. Explanation Ever since the Great Recession in 2008-2009, trust levels of the financial services industry have remained low relative to other sectors, according to the Edelman Trust Barometer. LO 1-3

Which one of the following statements comparing the suitability standard and the fiduciary standard is correct?

A) Both approaches are primarily solution-driven rather than product-driven. =B) Verbal disclosure may be adequate under the suitability standard but not the fiduciary standard. C) The suitability standard and the fiduciary standard are essentially the same thing. D) Both approaches require looking out for the best interest of the client. Explanation Fiduciaries have written disclosure requirements whereas verbal disclosure may be all that is required under the suitability standard. LO 1-3

Which of the following statements regarding disclosure is most accurate?

A) Disclosures must be written in the client's language. B) Generally, the fiduciary standard can be met with just full and adequate disclosure through documents such as Form ADV Part 2. =C) Research has shown that disclaimers are generally ineffective in alerting investors to the potential costs of conflict of interest. D) When acting as a fiduciary adviser, the more thorough and detailed the disclosure is, the more effective it becomes. Explanation Full and adequate disclosure is required, but is only one component of the fiduciary standard. A fiduciary must still carry out the duty of loyalty and always do what is best for the client-this cannot be met with disclosure alone. Even though disclosure is important research has shown that more disclosure and information is not necessarily better and can actually harm the people it is designed to protect. It is very important to focus on what information is delivered, how it is delivered, and how it is utilized by its receivers. LO 1-4

Which one of the following statements is correct regarding the summary plan description (SPD)?

A) It must be updated and distributed every time there is any material modification to a plan. B) It is the legal agreement establishing the terms of the retirement plan trust. =C) It is meant to be a summary and should be understandable to the average participant. D) It is the document that investment advisers use to manage the retirement plan's assets. Explanation The SPD is meant to be a summary of the plan and it should be understandable by plan participants. The legal agreements establishing the retirement plan is referred to as the adoption agreement. When there is a material modification then a summary of material modification (SMM) must be filed. Investment advisers often use an investment policy statement (IPS) to provide a roadmap for managing investments. LO 1-1

Which one of the following statements is correct?

A) Legal actions regarding the suitability standard are usually settled in public courts. B) Financial advisers are always held to the fiduciary standard. C) The fiduciary standard and suitability standard are both primarily principle-based. =D) Investment advice that is "solely incidental" is not held to the fiduciary standard. Explanation Advisers providing advice that is "solely incidental" to their practices are excluded from registering as registered investment advisers, meaning they are not held to the suitability standard. Financial advisers may or may not be held to the fiduciary standard, depending upon their roles. Most legal actions regarding the suitability standard are settled in arbitration, not the public court system. LO 1-3

Which of the following professionals would not be considered a fiduciary?

A) RIA managing assets in a qualified retirement plan B) CPA delivering personal financial planning C) CFP professional providing financial planning services =D) insurance agent recommending an annuity to save for retirement Explanation An annuity salesperson would not be held to the fiduciary standard, but rather to the suitability standard. LO 1-3

Which one of the following is a correct statement about the Prudent Investor Rule?

A) The Prudent Investor Rule requires that each and every investment be prudent by itself. B) Risk and return are of secondary importance for a fiduciary under the Prudent Investor Rule. =C) Complying with the Prudent Investor Rule requires a high degree of investment sophistication. D) The Prudent Investor Rule can be followed easily by both individual and professional investors. Explanation Complying with the Prudent Investor Rule requires a high level of skill and knowledge, and is best carried out by an investment management professional. The standard of prudence applies to any investment as part of the total portfolio rather than to that investment individually. Trade-offs between risk and return are important and must be considered by the fiduciary. LO 1-2

Which one of the following is a correct statement about the plan administrator in a retirement plan covered by ERISA?

A) The plan administrator is also the trustee for the plan. B) The plan administrator must perform all administrative functions. C) The plan administrator cannot be an employee of the company sponsoring the plan. =D) The plan administrator can outsource certain administrative functions. Explanation The plan administrator must ensure that the plan is in compliance with various standards and reporting requirements, however it is not unusual for a plan administrator to use a third-party administrative (TPA) firm for many administrative functions. The trustee of the plan is not necessarily also the plan administrator. LO 1-1

Which one of the following is a correct statement about the suitability standard?

A) The standard is regulated by FINRA and DOL. B) It requires written disclosure of conflicts of interest. =C) It has a "know your customer" rule and requirement. D) It requires looking out for the best interest of the client. Explanation The suitability standard requires that advisers know their clients and make suitable recommendations based on risk, profile, age, objectives, and time horizon. Verbal disclosure is often adequate, and only the fiduciary standard requires looking out for the best interest of the client. FINRA and the states regulate the standard, not the DOL. LO 1-3

The original Department of Labor (DOL) fiduciary standard rule for advisers found in ERISA

A) consists of five parts, and meeting any one of the five requirements makes an adviser a fiduciary. B) applies only to plan administrators and trustees. =C) consists of five parts, and all five parts must be met in order to be considered a fiduciary. D) applies to any advice given to all retirement plans and retirement plan participants. Explanation Under ERISA, an adviser is considered a fiduciary only if all five parts of the rule are met. ERISA and the original DOL fiduciary standard apply only to qualified company retirement plans and participants, not IRA account holders. LO 1-3

The SEC commissioned the RAND Corporation to carry out a study which found that there was a great deal of confusion for investors when it came to understanding the differences between

A) insurance agents and broker-dealers. =B) broker-dealers and investment advisers. C) advisers and insurance agents. D) investment advisers and investment managers. Explanation The RAND study found that there was a great deal of investor confusion between investment advisers and broker-dealers, including confusion over their duties, the titles they use, the services they offer, and the fees they charge. LO 1-3

A fiduciary must have the skills and competency necessary to provide fiduciary advice, and this is the duty

A) of loyalty. B) to consult. C) to diagnose. =D) of care. Explanation The duty of care requires the fiduciary to have the competency to give fiduciary advice which requires a certain level of knowledge and skill. LO 1-2

Which fiduciary is responsible for the safekeeping of retirement plan assets?

A) plan administrator B) named fiduciary C) 3(38) investment manager =D) trustee Explanation The trustee of the retirement trust is responsible for the safekeeping of retirement plan assets. LO 1-2

To whom can a plan participant go to find out who is the responsible fiduciary for any given aspect of the plan?

A) plan administrator B) trustee C) functional fiduciary =D) named fiduciary Explanation The named fiduciary is the responsible fiduciary that a plan participant can go to if they want to find out who is the responsible fiduciary for any given aspect of the plan. LO 1-2

Which one of the following is a "best practice" for being a fiduciary adviser?

A) provide as much disclosure to clients as possible =B) focus on "advice" and not "sales" C) use complex products for diversification of portfolios D) most advisers don't need to make any changes Explanation Providing sound advice at a reasonable fee is a best practice. Disclosure is important, but there are limits to its effectiveness, and too much disclosure can actually get in the way of a client making a sound decision. Complex products become more problematic under the fiduciary standard since these products often have higher fees and less transparency than traditional investments. A best practice is to focus on fiduciary advice and not sales. LO 1-4

The primary reason that ERISA has prohibited transaction rules is to

A) provide investment managers with guidance on what are suitable investments for plan assets. B) assure that plan participants have high rates of return on their investments. C) prohibit illegal activity and investments in retirement plan trusts. =D) protect the plan and its participants from self-serving activities of others connected to the plan. Explanation The prohibited transaction rules were put in place to protect qualified plans and their participants from the self-serving activities by plan sponsors, administrators, bankers, investment managers, and others charged with serving the interests of the plan and its participants. LO 1-2

ERISA eligibility requires attainment of age 21 and one year of service. One year of service is defined as working

A)at least 100 hours a month during the year. B)full-time for one year. =C)at least 1,000 hours during the year. D)a full calendar year. Explanation One year of service is defined as working at least 1,000 hours during the year. LO 1-1