Practice Test (EXCEPT Questions Only)

All of the following would be considered a "disqualified person" according to Title I of the Employee Retirement Income Security Act (ERISA) EXCEPT: A. A plan fiduciary B. A person providing service to the plan C. A 5% direct owner of the employer D. An officer of the employer organization E. A director of the employer organization

A 5% direct owner of the employer

All the following are reasons for a plan sponsor converting to a cash balance plan from a traditional defined benefit plan EXCEPT: A. A cash balance plan will be less expensive than a career-average defined benefit plan. B. The plan sponsor of a cash balance plan may guarantee an interest rate below what the sponsor expects it can generate on actual plan investments. C. Future plan costs may be reduced by the conversion. D. A cash balance plan may meet more employer objectives than a traditional defined benefit plan. E. A cash balance plan allows benefits to be expressed in terms appealing to employees, namely lump-sum distribution values instead of annuities.

A cash balance plan will be less expensive than a career-average defined benefit plan.

For a plan sponsor to qualify for statutory relief from fiduciary liability, items that must be supplied to a plan participant include all the following EXCEPT: A. A formal statement detailing how investment alternatives may be configured into an optimal portfolio B. The name, address and phone number of the plan fiduciary C. An identification of investment managers D. An explanation of how to give investment instructions E. A general description of the investment objectives and risk and return characteristics of each investment alternative

A formal statement detailing how investment alternatives may be configured into an optimal portfolio

Assuming an efficient market, a portfolio manager should devote most of his/her time to performing all of the following tasks EXCEPT: A. Analyzing individual securities B. Managing transaction costs C. Understanding tax ramifications on the portfolio D. Diversifying the portfolio E. Maintaining the appropriate portfolio risk

Analyzing individual securities

All the following are major factors that determine a firm's business risk (as opposed to financial risk) EXCEPT: A. Variability in demand B. Variability in sales price C. Changing technology D. Changes in the desired target capital structure E. Changes in input prices

Changes in the desired target capital structure

All the following statements regarding the efficient set of portfolios made possible by the Markowitz Model are correct EXCEPT: A. The efficient set dominates all interior portfolios because it offers the largest expected return for a given amount of risk, or smaller risk for a given expected return B. Points to the upper left of the efficient set are unattainable C. If two portfolios on the efficient frontier have the same level of risk but one has a higher expected return, the one with the larger expected return is said to "dominate" the other portfolio D. The global minimum-variance portfolio is represented by a point on the efficient frontier set where no other minimum variance portfolio has a smaller risk. E. Conservative investors would select portfolios on the upper right end of the efficient set

Conservative investors would select portfolios on the upper right end of the efficient set

All of the following are arguments used against international diversification EXCEPT: A. Cultural differences can impede foreign investment B. Economic performance differs widely among countries in the European Union C. Markets are becoming increasingly integrated as businesses pursue global strategies D. Transaction costs of international investments can be higher than those of domestic investments E. Some evidence exists that the international correlation of equity markets increases in periods of market distress

Economic performance differs widely among countries in the European Union

All the following are typical sources of risk for common stock investments EXCEPT: A. Interest rate risk B. Inflation risk C. Nonsystematic risk D. Market risk E. Extension risk

Extension risk

All of the following statements regarding rollover distributions from a qualified pension plan to an individual retirement account (IRA) or another employer's qualified plan are correct EXCEPT: A. The Economic Growth and Tax Relief Reconciliation Act expanded notice requirements for eligible rollover distributions. B. Before making the distribution, a plan administrator is required to send a rollover notification to the participant or beneficiary explaining rollover and direct transfer rules. C. For distributions exceeding $5,000, the plan into which the distributions are being rolled over must provide a written explanation about the potential restrictions and tax consequences that apply to the incoming distributions. D. A direct rollover is the default option for involuntary distributions that exceed $1,000 in the event a plan chooses to immediately distribute certain benefit amounts upon termination. E. There are tax withholding requirements on distributions that are not directly transferred.

For distributions exceeding $5,000, the plan into which the distributions are being rolled over must provide a written explanation about the potential restrictions and tax consequences that apply to the incoming distributions.

All the following describe characteristics of various types of common stocks EXCEPT: A. Blue chip stocks are issued by major companies and appeal primarily to pension funds seeking safety and stability. B. Growth stocks are issued by major companies with a long and unbroken history of dividend payments but a record of erratic earnings. C. Income stocks pay higher-than-average dividend returns and are uniquely attractive to some pension plans. D. Defensive stocks are issued by recession-resistant companies. E. Interest-sensitive stocks are stocks whose prices tend to drop when interest rates rise, and vice versa.

Growth stocks are issued by major companies with a long and unbroken history of dividend payments but a record of erratic earnings.

All of the following is (are) assumptions made in behavioral finance EXCEPT: A. Investors make most decisions based on rational beliefs B. Investors often make systematic mistakes when processing stock market information C. Investors succumb to the herding effect D. Investors strongly prefer avoiding losses as opposed to achieving an equivalent amount of gains E. Investors can be overconfident

Investors make most decisions based on rational beliefs

All of the following describe advantages and disadvantages of using a packaged product for target-date funds EXCEPT: A. It is cost-efficient B. It offers some portability C. It allows plan sponsors to engage the same manager who oversees the company's defined contribution plan D. It lacks the flexibility to accommodate participants with the same retirement target date but different investment goals E. It may not be suitable for all participants across companies that do not share the same demographics

It allows plan sponsors to engage the same manager who oversees the company's defined contribution plan

All of the following statements regarding the human-capital based argument in the context of equity exposure are correct EXCEPT: A. It is based on the premise that for younger workers the value of future earnings is an asset with bond-like characteristics. B. It is based on the premise that for younger workers the value of their Social Security benefits is an asset with stock-like characteristics. C. It maintains that younger workers have greater control to alter their future labor supply in response to bad stock market outcomes. D. It recommends that as investors approach retirement, they take on generally lower levels of risk by investing in bonds and in other fixed income securities. E. It provides the theoretical foundation for the declining equity exposure in target-date fund glide paths

It is based on the premise that for younger workers the value of their Social Security benefits is an asset with stock-like characteristics.

All the following forces have supported a paradigm shift where individuals are more likely now to use a wealth management approach in managing their retirement assets than in the past EXCEPT: A. The design and features of retirement plans now are very different from the plans popularized in the prior era. B. Increased portability has allowed plan participants to play a larger role in controlling their personal assets. C. There has been a movement of plan administration to external vendors. D. Much of the complexity of wealth management in the past has been simplified. E. Improved technology and innovations in record-keeping have facilitated the present more flexible system of wealth management.

Much of the complexity of wealth management in the past has been simplified.

All of the following external service providers may be delegated certain plan functions by a retirement plan committee EXCEPT: A. Plan trustee B. Recordkeeper C. Named fiduciary D. Actuary E. Plan consultant

Named fiduciary

All the following statements describe characteristics of a targeted-maturity lifecycle fund EXCEPT: A. It is assumed that this type of fund's investors who share a projected retirement date have similar objectives and risk tolerance. B. Its fund advisors automatically change asset allocation. C. Periodic monitoring is needed by its investors to determine if the fund's asset allocation continues to match the investor's risk profile through the stages of accumulation, transition and retirement D. Its time horizon is predetermined. E. Its final allocation is intended to see the investor through retirement.

Periodic monitoring is needed by its investors to determine if the fund's asset allocation continues to match the investor's risk profile through the stages of accumulation, transition and retirement

The Employee Retirement Income Security Act (ERISA) requires all of the following provisions in connection with reporting and disclosure and fiduciary duty EXCEPT: A. Generally a plan administrator must fill a participant's request for information to which he or she is entitled under the plan within 30 days B. Willful violation of any reporting and disclosure provisions by a plan administrator may incur a criminal penalty C. Records related to plan filings are required to be kept for a period of two years after the documents are due for filing D. Civil actions may be brought against a plan administrator by participants or beneficiaries to obtain information to which they are entitled under the plan E. Civil action may be brought by the Secretary of Labor against an individual who breaches his or her fiduciary duty

Records related to plan filings are required to be kept for a period of two years after the documents are due for filing

Rule 12b-1 fees assessed against a mutual fund offered as a qualified retirement plan investment option may be used to pay all of the following items EXCEPT: A. Commissions to brokers B. Advertising costs to promote the fund to investors C. Commissions to salespersons D. Remuneration to a plan sponsor in connection with property leased to the plan E. Fees of various service providers to a 401(k) plan pursuant to a bundled service arrangement

Remuneration to a plan sponsor in connection with property leased to the plan

All the following statements regarding the use of statistical models in personal financial planning are correct EXCEPT: A. Deterministic models use a set of "fixed" assumptions. They do not possess effective means for measuring risk although these models can illustrate risk by varying the assumptions and/or running the model multiple times. B. Stochastic models have a large number of fixed assumptions. These models vary one variable at a time to see how it changes the results. C. A model that provides a single, expected, future asset accumulation based on the inputs of beginning balance, years to retirement, investment return, ongoing savings amount, and salary increases is a deterministic model. D. The Monte Carlo technique is an example of a mixed model, having characteristics of both deterministic and stochastic models. E. The Pension Protection Act of 2006 allows investment advice to be provided by using an unbiased computer model that has been certified and audited by an independent third party.

Stochastic models have a large number of fixed assumptions. These models vary one variable at a time to see how it changes the results.

All the following are changes made by the Pension Protection Act (PPA) of 2006 EXCEPT: A. The PPA made changes to the mortality table and interest rate that is used to compute the minimum value of a lump-sum distribution paid from a defined benefit plan. B. The PPA made it clear that a qualified plan may provide distributions to an employee who attains age 62 even though the employee has not separated from service. C. The PPA permitted distributions for financial hardships that were previously allowed for conditions affecting spouses and dependents of plan participants to be extended to a participant's beneficiary under the plan. D. The PPA waived early withdrawal penalty tax on certain distributions to qualified reservists. E. The PPA required rollovers from various types of retirement savings plans to be first moved into a traditional IRA before the funds can be placed into a Roth IRA.

The PPA required rollovers from various types of retirement savings plans to be first moved into a traditional IRA before the funds can be placed into a Roth IRA.

All the following are elements in the Capital Asset Pricing Model Yes (CAPM) EXCEPT: A. The risk-free rate B. The market risk premium C. The beta for the stock D. The expected rate of return on the market E. The beta for Treasury bills

The beta for Treasury bills

Factors to consider when evaluating an indexed management strategy include all the following EXCEPT: A. The difficulty in communicating performance results to participants B. The inherent low cost of the strategy C. The minimal need to continually monitor performance and make changes D. The high likelihood that fund returns will be close to those of asset-class performance benchmarks E. The lost opportunity to outperform a market or market segment if markets are inefficient

The difficulty in communicating performance results to participants

All of the following transactions between a retirement plan and a "disqualified person" are prohibited EXCEPT: A. The leasing of property B. The disclosure of plan information C. Funding the plan by contributing debt securities D. The sale of property E. Furnishing goods and services

The disclosure of plan information

All of the following are conditions for a plan sponsor to qualify for fiduciary relief when investing participant assets in default investment alternatives EXCEPT: A. Generally the investments must be made in a qualified default investment alternative (QDIA) which must meet several requirements including that it not hold or permit the acquisition of employer securities. B. The participant or beneficiary on whose behalf assets are being invested in a QDIA had the opportunity to direct the investment of assets in his or her account but did not direct the assets. C. The participant or beneficiary on whose behalf an investment in a QDIA may be made is given a notice within a reasonable period of time in advance of each subsequent plan year. D. The participant or beneficiary on whose behalf an investment in a QDIA may be made must be afforded the opportunity to make future plan contributions to any other investment alternative under the plan at any time without financial penalty; transfers of current plan accumulations may be subject to financial penalties. E. The terms of the plan must require that any material provided to the plan relating to a participant's or beneficiary's investment in a QDIA ( for example, account statements, prospectuses, proxy voting material) be provided to the participant or beneficiary.

The participant or beneficiary on whose behalf an investment in a QDIA may be made must be afforded the opportunity to make future plan contributions to any other investment alternative under the plan at any time without financial penalty; transfers of current plan accumulations may be subject to financial penalties.

All of the following statements regarding the Capital Asset Pricing Model (CAPM) are correct EXCEPT: A. CAPM uses standard statistical techniques to analyze the relationship between the periodic returns of the portfolio and those of the market B. Once the portfolio's beta has been computed, it is possible to use the CAPM to provide a risk-adjusted measure of the portfolio's performance C. Although several modifications of the regression analysis exist, most applications will begin by subtracting out a risk-free rate of return from both the portfolio and market returns D. The portfolio's alpha value can be thought of as the amount of return which is dependent on the return of the market E. The risk-adjusted rate of return can be used to measure risk-adjusted performance and to compare portfolios with different risk levels developed by actual portfolio decisions

The portfolio's alpha value can be thought of as the amount of return which is dependent on the return of the market

The investment manager for a pension plan is analyzing the risk of a particular investment and has developed the following simplified figures: Possible Return Probability 5% .30 10% .50 20% .20 Using the above figures, all the following statements are correct EXCEPT: A. The expected return is 10.5% B. The "possible returns" must be expected returns, not actual realized returns earned in the past C. The standard deviation is about 5.22% D. The standard deviation would be smaller if the possible returns were 8%, 10%, and 12% E. The standard deviation is calculated by taking the square root of a number that is approximately 49%

The standard deviation is calculated by taking the square root of a number that is approximately 49%

All of the following statements regarding non-traditional asset classes for target-date funds (TDFs) are correct EXCEPT: A. Real estate investment trusts (REITs) are among alternative asset classes incorporated in TDFs. B. These asset classes provide greater diversification, potentially higher total returns. C. The value of these asset classes is less likely to be subject to demand and supply conditions. D. These asset classes have the potential to offer benefits from market inefficiencies through skill-based strategies. E. A study has shown that in some cases the inclusion of these asset classes has led to significant fund underperformance.

The value of these asset classes is less likely to be subject to demand and supply conditions.

Closed-end investment companies are described by all the following EXCEPT: A. Their capitalizations are fixed unless a new public offering is made. B. Their shares trade in the secondary markets exactly like other stocks. C. Their portfolios must include some liquid assets to meet redemptions of shareholders. D. Their prices may exceed their net asset value. E. Their prices may be less than their net asset value.

Their portfolios must include some liquid assets to meet redemptions of shareholders.

All of the following are reasons for the growth of target-date funds EXCEPT: A. The funds are designed to simplify participant retirement investment decisions. B. They are ideal for the automatic re-allocation of assets when a participant's time horizon and spending needs change. C. They are popular default options for plan sponsors with an automatic enrollment feature in their defined contribution plans. D. They have been designated by the Department of Labor as a qualified default investment alternative option. E. A number of plan sponsors are actively transferring participants into these funds from other funds in their plan

They are ideal for the automatic re-allocation of assets when a participant's time horizon and spending needs change.

All the following statements regarding investment companies are correct EXCEPT: A. They are insured/guaranteed by the Securities and Exchange Commission (SEC) B. They have to register with the SEC C. Most of them are regulated D. They pass their earnings through each year to investors in the form of dividends, interest, and realized capital gains E. They pool the funds of many of investors

They are insured/guaranteed by the Securities and Exchange Commission (SEC)

All the following statements regarding money market funds are correct EXCEPT: A. They are not insured. B. They do not have redemption fees. C. They do not have sales charges. D. They do not have a management fee. E. They are open-end investment companies.

They do not have a management fee.

All of the following are reasons for pension plans, especially those with small assets under management, choosing mutual funds as investment vehicles EXCEPT: A. Timing of investment earnings derived from mutual funds match the disbursement schedule of benefit payments. B. Mutual funds provide a simple way of meeting asset allocation or market timing goals. C. Mutual funds facilitate portfolio specialization. D. Mutual funds provide a high degree of diversification. E. The past performance of mutual funds can be easily ascertained through published studies and indexes.

Timing of investment earnings derived from mutual funds match the disbursement schedule of benefit payments.

All of the following statements regarding disclosure requirements for benefit statements are correct EXCEPT: A. The Pension Protection Act modified these requirements. B. To a participant in a defined contribution plan who is entitled to direct plan investments, a plan sponsor must provide a statement once per quarter. C. To a participant in a defined contribution plan who is not entitled to direct plan investments, a plan sponsor must provide a statement once every two years. D. To an active, vested participant of a defined benefit plan, one option available to a plan sponsor is to provide a benefit statement once every three years. E. To an active, vested participant of a defined benefit plan, one option available to a plan sponsor is to provide an annual notice describing the availability of a benefit statement and the manner in which the participant can obtain one.

To a participant in a defined contribution plan who is not entitled to direct plan investments, a plan sponsor must provide a statement once every two years.

All the following factors are included in determining an employee's cost basis in a qualified plan for tax purposes EXCEPT: A. The aggregate of any amounts the employee contributed on an after-tax basis while employed B. In general, the aggregate of prior insurance costs the employee has reported as taxable income C. Various contributions made by the employer that have yet to be taxed to the employee D. Loans from the qualified retirement plan to the participant that were treated as taxable distributions E. Certain items, such as contributions made by the employer after 1950 but before 1963 while the employee was a resident of a foreign country

Various contributions made by the employer that have yet to be taxed to the employee