10 - Communication, Investment Advice and Other Participant Services

Question 1

Regardless of the technological advancements, the fundamental nature of employee benefits communications remains the same. Whether print or nonprint media are used, their objectives do not change and can be classified into three areas:

(1) Adhere to statutory ______ and _______ requirements
(2) Support employee benefits ______ strategies
(3) Support human resource _______ and _______ objectives.

Answer 1

reporting / disclosure

cost-containment

recruitment / retention

Question 2

There are several key times when employers commonly communicate with their employees regarding employee benefit programs. Among these key times are:

• (a) As ________
• (b) As part of the _______ communication process
• (c) As part of the ongoing interaction when employees experience a ______ or make routine _____ to their benefit programs
• (d) At the time that the employee ______ employment
• (e) As a ______ if the employee continues to be eligible for certain benefits.

Answer 2

• new hires
• open enrollment
• life event / changes
• terminates
• retiree

Question 3

In addition to the times when employees routinely interact with their employers regarding employee benefits, employers may choose to initiate contact with employees regarding employee benefit programs. An employer may initiate contact for various reasons.

One of the primary reasons for initiating contact may be to enhance employee _________ and appreciation of employee benefit programs. Especially as employers have placed more responsibility on employees for managing risk with participant-directed _______ plans, the employer has a stake in assuring that employees understand plan features and make the best use of these programs.

An employer may initiate contact to provide ________ education. Efforts to improve knowledge, understanding and outcomes with these plans can actually be beneficial to the employer in demonstrating that the employer as a plan sponsor is fulfilling _______ responsibilities.

Answer 3

• understanding
• defined contribution
• investment
• fiduciary

Question 4

A person (or corporation) is considered a fiduciary under ERISA if that person exercises any _______ authority or control over the management of the plan, exercises any authority or control over assets held under the plan or the disposition of plan assets, renders investment advice for direct or indirect compensation (or has any authority or responsibility to do so), or has any discretionary authority or responsibility in the _______ of the plan.

Clearly, the ______ of a plan is a fiduciary. So also are officers and directors of a corporation who have responsibility for certain fiduciary functions—for example, the appointment and retention of trustees or investment managers or the appointment and monitoring of an investment advice provider.

On the other hand, individuals whose duties are purely _______ (e.g., applying rules of eligibility and vesting) are clearly not fiduciaries.

Answer 4

• discretionary
• administration
• trustee
• ministerial

Question 5

Under the law a fiduciary possesses several responsibilities. A fiduciary is required to discharge all duties solely in the interest of participants and beneficiaries and for the exclusive purpose of providing plan benefits and defraying reasonable administrative expenses. In addition, a fiduciary is charged with using the care, skill, prudence and diligence that a prudent person who is familiar with such matters would use under the circumstances then prevailing—a standard that has come to be called the _________.

A fiduciary also is responsible for ________ investments so as to minimize the risk of large losses unless it is clearly prudent not to.

Finally, the fiduciary must conform with the documents governing the plan and must invest only in assets subject to the jurisdiction of ______. This latter requirement does not preclude investing in international securities; it simply requires that the assets be held in a manner such that they are subject to the jurisdiction.

Answer 5

prudent expert rule

diversifying

U.S. courts

Question 6

Both labor law (Title I of ERISA) and the Internal Revenue Code (IRC) prohibit certain transactions between the plan and “disqualified persons.”

A disqualified person is broadly defined to include any plan _______; a person providing service to the plan; any employer or employee organization whose employees or members are covered by the plan; a direct or indirect owner of __% or more of the business interest of the employer; a ______ of any of the above; an officer, director and certain highly compensated employees (HCEs); or a person having ___% or more of the ownership interest in any of the preceding.

Under ERISA, an employee also is considered to be a __________; an employee, however, is not considered to be a disqualified person.

Answer 6

• fiduciary
• 50%
• relative
• 10%
• party in interest

Question 7

The following transactions between the plan and a party in interest or a disqualified person are prohibited:

• The sale, exchange or leasing of ______
• Lending money or extending credit (including funding the plan by contributing debt securities)
• Furnishing goods, services or facilities
• A transfer or use of _____
• The acquisition of qualifying __________ and ________ in excess of allowable limits.

These prohibitions apply even to “_________” transactions and even though the plan is fully protected.

Answer 7

• property
• plan assets
• employer securities / real property
• “arm’s length”

Question 8

Under ERISA, a fiduciary will be personally liable for any breach or violation of responsibilities and will be liable to restore any _______ made through the use of plan assets.

Under the IRC, an _______ of a percentage of the amount involved in a prohibited transaction may be levied on the disqualified person who engages in the transaction.

For prohibited transactions occurring after August 5, ____, the initial excise tax is __% of the amount involved. If the situation is not corrected within the time allowed (__ days unless extended by the Internal Revenue Service (IRS)), a further excise tax of ___% of the amount involved may be imposed. However, engaging in a prohibited transaction will not cause the plan to be _______.

Answer 8

• profits
• excise tax
• 1997
• 15%
• 90
• 100%
• disqualified

Question 9

Apart from excise taxes that might be imposed because of a prohibited transaction under the tax law, a fiduciary will be personally liable for any breach or violation of responsibilities and will be liable to restore any profits made through the use of plan assets.

In addition, the Department of Labor (DOL) may impose a __% penalty on any fiduciary who is found liable for a breach of fiduciary rules. The penalty is applied to the recovery amount—that is, the amount recovered from the fiduciary on behalf of the plan or its participants pursuant to either an out-of-court settlement with DOL or a court order under a judicial proceeding instituted by DOL.

DOL may waive or reduce the penalty in cases where the fiduciary acted reasonably and in good faith or where the fiduciary will not be able to restore all losses to the plan absent the waiver or reduction. The penalty is automatically reduced for prohibited transactions by the ___% excise tax imposed in those cases.

Answer 9

20%

15%

Question 10

A fiduciary may be liable for the violations of a co-fiduciary if the fiduciary knowingly participates in or conceals a violation, has knowledge of a violation, or by the fiduciary’s own violation enables the co-fiduciary to commit a violation. If a plan uses _____ trusts, however, a trustee of one trust is not responsible for the actions of the other trustees.

Also, a fiduciary will not be responsible for the acts of a duly appointed __________ (except to the extent that the fiduciary did not act prudently in selecting or continuing the use them).

A trustee also is not responsible for following the direction of ________ in making investment decisions if the plan so provides.

Answer 10

• separate
• investment manager
• named fiduciaries

Question 11

What are earmarked investments and what conditions must be satisfied by plan sponsors if they are to be exempted from fiduciary liability associated with these investments?

• The law permits a __________ plan to be established on a basis that allows earmarked investments—That is, employees are allowed to direct the investment of their own accounts.

The DOL has issued regulations that provide statutory relief from fiduciary liability under these plans if certain requirements are met. Failure to comply with these requirements does not necessarily mean that the fiduciaries will be liable for investment performance; it simply means that this regulatory protection is not available. To ensure that participants have both control over their assets and the opportunity to diversify their holdings, the regulations:

• (a) Require the plan to provide participants with reasonable opportunities to give investment ________ to the plan fiduciary who is obligated to comply with these instructions
• (b) Require that a plan offer at least _____ “diversified categories of investment”—with materially different risk and return characteristics—that collectively allow participants to construct a portfolio with risk and return characteristics within the full range normally appropriate for a plan participant
• (c) Establish specific rules regarding participant transfer elections; sponsors must allow at least _______ elections for transfers in or out of the three diversified investment options that must, as a minimum, be offered under the plan, and more frequent transfers may be required if appropriate in light of the ________ of a particular investment.

Answer 11

• defined contribution
• instructions
• three
• quarterly
• volatility

Question 12

In order to qualify for statutory relief from fiduciary liability, what must a plan sponsor supply to a plan participant regarding investment alternatives?

1. A general description of the investment _______ and risk and return characteristics of each investment alternative
2. An explanation of how to give investment _______ and any limitations on them
3. An identification of _______
4. An explanation of ______, tender and similar rights
5. A description of transaction fees and expenses that could affect the participant’s ______
6. The name, address and phone number of the plan ______
7. Where appropriate for the investment alternative, any applicable ______
8. A notice that the plan is intended to comply with ERISA Section _____ and that fiduciaries’ liability is thereby limited
9. If a plan utilizes _________ and default investment alternatives, these must be specified

Answer 12

1. objectives
2. instructions
3. investment managers
4. voting
5. account balance
6. fiduciary
7. prospectus
8. 404(c)
9. automatic enrollment

Question 13

While employers recognize the need to encourage employees to save, historically they had been reluctant to provide extensive education about investing savings. This reluctance had been due, in part, to the fiduciary provisions of ERISA, which impose both _______ and ______ on those who provide investment advice for a fee or other compensation.

With PPA providing guidelines on a plan sponsor’s ability to appoint a fiduciary _________, it is expected that more plans will make use of these services and be less concerned about prohibited transactions related to paying fees for investment advice.

Answer 13

• responsibility
• liability
• investment advisor

Question 14

The DOL issued an interpretive bulletin to enable employers and providers to distinguish between education and advice. The bulletin specifies four types of investment-related information that employers could provide without fear of exposing themselves to fiduciary liability in the view of the DOL. These (4) safe harbors are:

Answer 14

1. General plan provisions.
2. General financial and investment information.
3. Asset allocation models.
4. Interactive investment material.

Question 15

Plan sponsors are not required to offer investment advice services. However, if plan sponsors offer such services to their participants, there are certain fiduciary responsibilities. Plan sponsors must prudently select the advice provider. Subsequently, the plan sponsor also must ______ the investment advice provider.

Answer 15

monitor

Question 16

The DOL has taken the position that participant contributions become plan assets as of the date they can be ________ from the employer’s general assets but no later than __ days after withholding.

However, the DOL issued final regulations in August _____ that shorten this outside deadline to the __ business day following the month in which the employee contribution is received or withheld. A procedure is set forth under which an employer can obtain an additional ___ business days if certain conditions are met.

Answer 16

• segregated
• 90
• 1996
• 15th
• ten

Question 17

There are certain key themes that have emerged in the study of behavioral economics. Among these key themes are the following (3):

Answer 17

1. heuristics
2. Framing
3. Market inefficiencies:

Question 18

People often make decisions based on approximate, so-called rules of thumb that are not entirely grounded in strictly rational analyses. Shortcuts to decision making can result from difficulty in assembling all of the relevant information or from limitations on the decision maker’s capabilities or competencies. Therefore, decisions often fall short of the optimal positive determinations suggested by neoclassical economists.

Answer 18

Heuristics

Question 19

The way a problem or decision is presented will affect his or her action. The outcome then is less than optimal. Importantly, decision makers are influenced by the depiction of the choice, and their decisions appear to be susceptible to manipulation. This theme has both negative and positive implications. On the negative side, it suggests that economic agents’ decisions can be flawed and are far less reliable and logical than previously envisioned. On the positive side, however, is the potential promise that decisions framed differently can guide decision makers to make more optimal choices.

Answer 19

Framing

Question 20

Market outcomes diverge from what would be expected if market efficiency was present. Real-life outcomes that previously appeared unexplainable by economic modeling are seen as explainable once social, cognitive and emotional biases are recognized. No longer must observable conditions in the real world be deemed unexplainable or mysteriously incongruent with logical economic modeling. The introduction of a more accurate portrayal of human economic agents explains market conditions.

Answer 20

Market inefficiencies

Question 21

Describe how the following factors result in inactivity on the part of individuals managing their own investments:

1. Individual investors are loss-averse: Research indicates that individuals suffer more remorse as a result of losses than they experience satisfaction or pleasure for their gains. Essentially individuals do not rate gains and losses of equal magnitude equally. It has been found that on average, if a gain and loss were of the same magnitude, individuals felt more remorse for losses by a factor of __ or __ times the satisfaction felt for a gain. The implication of this finding is that convincing individuals to forego present consumption for a future payment at a later date may be difficult. In short, it is a challenge from the outset to convince many individuals to ________.

Answer 21

2 or 2.5

save for retirement

Question 22

Describe how the following factors result in inactivity on the part of individuals managing their own investments:

Hyperbolic discounting: Apart from sheer loss aversion that results from foregoing current consumption, individuals tend to overemphasize immediate desires and rewards at the expense of their longer term needs. Not surprisingly, the present needs consistently present themselves as more pressing.

Hyperbolic discounting is the human tendency, when faced with uncertainty, to sharply reduce the importance of the future in the decision- making process. Consequences that occur at a later time, good or bad, tend to have a lot less bearing on choices when they occur in the future. Survey results have shown that ___% of workers who have access to a defined contribution plan fail to contribute at all, while fewer than ___% will contribute at the maximum level allowed under the law. Furthermore, consumption levels tend to progress upward as income levels increase. Individuals have a proclivity to spend more as they _______

Answer 22

25

10

earn more.

Question 23

Describe how the following factors result in inactivity on the part of individuals managing their own investments:

Procrastination and inertia: Individuals have a tendency to delay making decisions and have difficulty once they delay a decision to take action to change their course or direction. Inactivity in decision making tends to have a “_______” that demands more effort to overcome once a decision is delayed, deferred or avoided.

Procrastination may result from a bias toward the status quo that is described next. At times, a decision to maintain the status quo may make rational sense, but at other times, particularly when the cost of a delayed decision is high, the preferential bias toward the status quo is clearly ______. For instance, when an employee is willing to forego an employer match in a 401(k) plan, procrastination and inertia are clearly irrational.

Answer 23

stickiness

irrational

Question 24

Discuss how the following factors result in suboptimal active choices for individuals managing their own investments:

Bounded rationality:

Even if individuals do not succumb to choice overload, the odds against making _____ choices are formidable, a condition known as bounded rationality. Individuals have limitations regarding their mental capabilities to deal with complexity inherent in retirement planning. The historical portrayal of economic agents assumed capabilities exceeding the skill-set of many individuals.

Overweighting of past performance:

Investors seem to overweight past performance as an indicator of future performance, particularly when reviewing the performance of mutual funds. Funds routinely caution prospective investors that past performance is not a guarantee of future performance. Nevertheless, investors disregard this caution. Investors may be relying on the only information, or what they consider the best information, they possess regarding a gauge of the fund’s performance. However, all too often the investor is more likely to experience reversion to the mean in future years, rather than continued above-average performance by a given fund manager. It also should be noted that fund families often heavily advertise those funds within their family of funds that have turned in a stellar performance. Many investors may be reacting to the advertising stimuli they are receiving to a greater extent, rather than making a reasoned determination as to where to best direct their investable funds.

Answer 24

optimal

Question 25

Life cycle funds are mutual funds to facilitate asset allocation decisions based on the participant’s _____.

There are two basic types: static allocation funds and targeted-maturity funds.

With the static allocation approach, the funds maintain an established ________. A series of funds are offered with some funds being aggressive and other fund offerings having less risk. Investors determine which fund is appropriate given their individual risk tolerance. Individuals often use more aggressive funds at younger ages, and transition into the less aggressive funds as they age and approach retirement.

The second approach offers a series of funds with ___________ designated. An individual selects a fund with the approximate or exact year in which he or she expects to retire. Unlike the static allocation funds where an individual must move to less aggressive funds as he or she approaches retirement, the targeted-maturity funds automatically rebalance and shift investments from aggressive to more conservative asset allocations as the target date approaches. The final allocation as of the targeted date is often intended to remain intact throughout the retirement years.

Answer 25

age

asset allocation

target retirement dates

Question 26

If the plan sponsor is to receive relief from liability, each participant must receive, within a reasonable period of time before each plan year, a _______ explaining the employee’s right under the plan to designate how contributions and earnings will be invested and explaining how, in the absence of any investment election by the participant, such contributions and earnings will be invested.

Answer 26

notice

Question 27

The six conditions to qualify for fiduciary relief when investing participant assets in default investment alternatives are:

1. Assets must be invested in a qualified default _________
2. The participant or beneficiary on whose behalf assets are being invested in a qualified default investment alternative had the opportunity to direct the investment of assets in his or her account but _____
3. The participant or beneficiary on whose behalf an investment in a qualified default investment alternative may be made is furnished a notice within a reasonable period of time (at least ___ days), in advance of each subsequent plan year.
4. The terms of the plan must require that any ______ provided to the plan relating to a participant’s or beneficiary’s investment in a qualified default investment alternative (e.g., account statements, prospectuses, proxy voting material) be provided to the participant or beneficiary.
5. Any participant or beneficiary on whose behalf assets are invested in a qualified default investment alternative must be afforded the opportunity, consistent with the terms of the plan, to transfer, in whole or in part, such assets to any other investment alternative available under the plan without _________.
6. The plan must offer participants and beneficiaries the opportunity to invest in a broad range of investment alternatives as specified in the Section _____ regulation. DOL believes that participants and beneficiaries should have access to a sufficient range of investment alternatives to achieve a diversified portfolio with aggregate risk and return characteristics at any point within the range normally appropriate for the retirement plan participant or beneficiary. DOL believes that the application of the broad range of investment alternatives standard of the Section 404(c) regulation accomplishes this.

Answer 27

1. investment alternative.
2. did not
3. 30
4. material
5. financial penalty
6. 404(c)

Question 28

What are the five requirements for a qualified default investment alternative?

1. Generally, a qualified default investment alternative shall not hold or permit the acquisition of _________.
2. A qualified default investment alternative may not impose financial penalties or otherwise restrict the ability of a participant or beneficiary to ______, in whole or in part, his or her investment from the qualified default investment alternative to any other investment alternative available under the plan.
3. A qualified default investment alternative must either be managed by an investment manager as specified under ERISA, or by an investment company registered under the Investment Company Act of _____. The regulation requires that, except in the case of registered investment companies, those responsible for the management of a qualified default investment alternative be “__________” as defined by ERISA.
4. A qualified default investment alternative must be _______ so as to minimize the risk of large losses.
5. A qualified default investment alternative conditions ______ on the use of one of three types of investment products, portfolios or services. These three types of investment products, portfolios or services include:
   
   1. An investment fund product or model portfolio based on the participant’s age, target retirement date or life expectancy. An example of such a fund or portfolio may be a ______ or targeted-retirement-date fund or account.
   2. An investment fund product or model portfolio with a target level of risk appropriate for participants of the plan as a whole. An example of such a fund or portfolio may be a _______ fund.
   3. An investment management service where an investment manager allocates the assets of a participant’s account based on the participant’s age, target retirement date or life expectancy. An example of such a service may be a _______.

Answer 28

1. employer securities
2. transfer
3. 1940 / investment managers
4. diversified
5. relief
   
   1. life cycle
   2. balanced
   3. managed account

Question 29

[providing investment advice to plan par-ticipants]

For a prohibited transaction exemption, providers of investment advice must use either of the following approaches:

1. supply a set of portfolio recommendations to the participant or beneficiary based on an ____________ that has been certified and audited by an independent third party, or
2. provide investment advice services at a _____ that does not vary depending on the investments selected.

Answer 29

1. unbiased computer model
2. flat fee

Question 30

The DOL mandated disclosures be made by plan sponsors to all plan participants and beneficiaries if TDFs (target date funds) are offered as a qualified default investment alternative under a defined contribution retirement plan. These disclosures must be made to the participants and beneficiaries regardless of whether or not the participants and beneficiaries have actually in fact been defaulted into a TDF. Among the required disclosures are:

1. An explanation of the TDF’s _______, how it will change over time, and the point at which the investment will reach its most conservative asset allocation, including a chart, table, or other graphical representation.
2. An explanation, if the fund by name includes or implies a _______, of the age group for whom the investment is designed, the relevance of that date, and any assumptions about a participant’s contribution and withdrawal intentions on or after such date.
3. A statement that the participant may _______ by investing in a TDF, including losses near and following retirement, and that there is no guarantee that the investment will provide adequate retirement income.

Answer 30

1. asset allocation
2. target date
3. lose money

Question 31

In addition to the disclosure requirements mandated for TDFs, the DOL required expanded, additional disclosures for qualified default investments. Among these expanded, additional disclosures were:

1. The _______ of the qualified default investment alternative issuer
2. The investment _______ or goals
3. A description of the investment’s principal ______ and ______
4. _______performance data and, if applicable, any fixed return, annuity, guarantee, death benefit, or other ancillary features
5. A statement indicating that an investment’s past performance is not necessarily an indication of its future performance
6. A description of fees and expenses, including those charged directly against the amount invested in connection with acquisition, sale, transfer, or withdrawal of any annual operating expenses (e.g., ______ ratio); and any ongoing expenses in addition to annual operating expenses (e.g., _____ and expense fees).

Answer 31

1. name
2. objectives
3. strategies / risks
4. Historical
5. ______
6. expense / mortality