8 - 401(k) Practice Issues

Question 1

some of the emerging issues of relevance to 401(k) plans (4)

Answer 1

• (a) innovative investment products
• (b) Behavioral finance investments
• (c) Distribution planning
• (d) Fee transparency

Question 2

_________ is a portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocation.

Answer 2

Strategic asset allocation

Question 3

Which type of fees generally represents the largest charge assessed against a 401(k) plan?

Answer 3

investment management fees

Question 4

As a result of the clarifications made by PPA of 2006, plan sponsors can prudently select and monitor investment advice providers and allow them to provide personally tailored investment advice to plan participants. By doing so, plan sponsors will be exempt from liability associated with the advice provided by an investment advisor operating under an _________

Answer 4

“eligible investment advice arrangement.”

Question 5

______ are fundamental principles associated with appropriate and rational investing. Among these principles would be modern portfolio theory and strategic asset allocation.

Answer 5

Generally accepted investment theories

Question 6

is a directed trustee responsible for investment decision making?

Answer 6

No - responsible for processing investment orders in a timely and accurate manner.

Question 7

The Pension Protection Act of 2006 (PPA) contained a number of features that made it easier for plan sponsors to offer automatic enrollment features for their 401(k) plans.

• 1) directed _____ to issue guidance clarifying acceptable default investment options that would exempt employers from certain fiduciary obligations.
• 2) preempted laws when these rules conflicted with retirement plan automatic enrollment provisions
• 3) permits the distribution of employee contributions if an appropriate election is made within __ days of the first payroll deduction.

Answer 7

• EBSA
• state wage-withholding
• 90

Question 8

The Department of Labor (DOL) has not issued formal guidance explaining how a plan sponsor should evaluate a provider of services and/or specific investment options for a participant-directed 401(k) plan. However, DOL has indicated that “plan fiduciaries must conduct an objective, thorough and analytical _______. . . . Furthermore, the DOL has indicated that in conducting such an analysis, a fiduciary must evaluate a number of factors and reliance solely on ratings provided by ______ agencies would not be sufficient to meet this requirement.” Similarly one could conclude that a plan utilizing mutual funds could not fulfill this requirement by solely relying on the services of a mutual fund rating service.

Answer 8

search

insurance rating

Question 9

oftentimes a bank or a trust company, is the entity that executes the buying and selling of plan assets on behalf of plan partici- pants.

Answer 9

The directed trustee

Question 10

if a plan sponsor decides to contract with external vendors for these services, the operational functions may be purchased separately using what is known as an “________ approach” or these operational functions may be purchased together from a single provider using what is known as the “______ approach.”

Answer 10

unbundled bundled

Question 11

ADP stands for:

Answer 11

actual deferral percentage

Question 12

________ is a theory instructing risk- averse investors on a method to construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.

Answer 12

Modern portfolio theory

Question 13

The classification used in the EBSA study segregated fees into the following major categories: (6) (Fee transparency)

Answer 13

1. Set-up and conversion fees
2. Recurring and administrative costs
3. Communications expenses
4. Investment management fees
5. Distribution fees
6. Mortality and expense risk fees

Question 14

(3) different approaches to procuring recordkeeping services under the unbundled approach to 401(k) plan management.

Answer 14

• retain the recordkeeping
• through an investment advisor or broker
• use of a third-party administrator (TPA) (prevalent in small plan marketplace)

Question 15

The _______ providers supply all five component functions described in Question 5. Traditionally the firms offering this approach have been banks, mutual funds and insurance companies. These firms tend to emphasize their own investment offerings and related services as their core competency or area of expertise.

Answer 15

bundled

Question 16

While there are many variations in matching formulas, an employer pay-in of __% up to the first _% of _____ that the employee contributes is increasingly considered to be the industry standard by a majority of employers.

Answer 16

50% 6% salary

Question 17

There are several decision elements in the initial design and ongoing administration of a 401(k) plan. Among these decision elements are: (6)

Answer 17

1. design
2. handle administrative tasks
3. communicate
4. fulfill fiduciary responsibilities
5. control costs
6. implement technology

Question 18

the actual plan _____ decisions often are inextricably entwined with the _________ selected for administering the plan. therefore a plan sponsor should contemplate elements of plan design and elements of ongoing operation and administration when configuring a 401(k) plan or other defined contribution savings vehicle

Answer 18

• design
• operational model

Question 19

When determining whether a plan is meeting its objectives, it is important to concentrate analysis on the core elements of design that are most likely to determine plan success and impact whether participants utilize the plan to its full advantage.

Two of the most important attributes of plan design involve whether an employer will provide

Answer 19

• if employer contribution is provided, and the level
• menu of investment options

Question 20

Does offering a larger number of fund options within a 401(k) plan encourage greater participation by plan participants?

In one research study it was found that for every ten funds added to a plan’s menu, the probability that an employee will take part in a retirement savings plan drops by ___. The boost in funds apparently made employees more _____, leading the participants to increase their contributions to money market and bond funds by five percentage points and lower their allocations to stock funds by seven to nine percentage points.

Answer 20

NO

2%

risk averse

Question 21

in order to operate a 401(k) plan, a plan sponsor must oversee a minimum of at least _____ distinct operational functions.

Answer 21

five

Question 22

In terms of elements of design, certain key decisions are foundational features in designing a successful 401(k) plan. Among these are: (7)

• level of __________
• the number and type of __________
• option of __________
• whether to adopt a _______ plan design
• whether and how ________ will occur
• how to provide adequate investment __________
• how investment __________ advice may be provided

Answer 22

• employer matching contributions;
• investment options;
• Roth 401(k) deferral contributions;
• safe harbor
• automatic enrollment
• diversification
• education and investment

Question 23

As a result of PPA, when must publicly traded companies allow participants in their defined contribution plans to diversify from plan investments being held in publicly traded employer securities?

Participants who have completed three years of service must be permitted to diversify the investment of any _______. To comply with these requirements, plans must offer at least ____ diversified investment options other than employer securities, and plans must permit diversification elections to be made at least _____.

(important)

Answer 23

immediately

employer contributions

three

quarterly

Question 24

distinct operational functions involved in 401(k) plan management (5)

Answer 24

• compliance
• communication
• Investment management services
• Recordkeeping
• Directed trustee services

C C I R D

Question 25

Generally 401(k) plan sponsors can comply with nondiscrimination testing requirements in one of (3) ways:

(important)

Answer 25

1. normal testing involving the examination of each participant’s deferrals
2. Utilizing the safe harbor plan designs
3. formulaic employer matching or nonelective contributions in conjunction with an automatic enrollment feature.

Question 26

When opting for the ______ approach, a lead or primary vendor generally would provide one or two of the five necessary services described in Question 5 and would serve to coordinate and oversee the direction of the other services by subcontracting with specialized vendors.

Answer 26

unbundled

Question 27

Under the law, the plan sponsor is responsible for the operation of a retirement plan and is liable for breaches of fiduciary duty. The duties of fiduciaries are described in Section _____ of the Employee Retirement Income Security Act (ERISA).

Answer 27

404(a)(1)

Question 28

The reluctance to offer an automatic enrollment feature arose from the concern that automatic enrollment could give rise to certain adverse _______ for the plan sponsor.

Answer 28

fiduciary liabilities

Question 29

One of the key challenges associated with the ETF involves _______ issues since ETFs settle in ___ days when traded, in contrast with traditional mutual funds which offer a net asset value at the end of each day

Answer 29

• valuation and recordkeeping
• three

Question 30

Sales commissions for insurance products, including group and individual annuities, may be structured with two components.

• __________are paid on balances transferred from other providers as well as periodic contributions into the plan.
• ___________ are paid on assets under management, including the growth from investment returns, and con- tinue as long as the plan continues with the same insurance provider.

Both are typically combined and incorporated as part of the ______.

Answer 30

• Deposit commissions
• Trail commissions
• wrap fee