8 - 401(k) Practice Issues Flashcards
some of the emerging issues of relevance to 401(k) plans (4)
- (a) innovative investment products
- (b) Behavioral finance investments
- (c) Distribution planning
- (d) Fee transparency
_________ is a portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocation.
Strategic asset allocation
Which type of fees generally represents the largest charge assessed against a 401(k) plan?
investment management fees
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 _________
“eligible investment advice arrangement.”
______ are fundamental principles associated with appropriate and rational investing. Among these principles would be modern portfolio theory and strategic asset allocation.
Generally accepted investment theories
is a directed trustee responsible for investment decision making?
No - responsible for processing investment orders in a timely and accurate manner.
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.
- EBSA
- state wage-withholding
- 90
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.
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insurance rating
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.
The directed trustee
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.”
unbundled bundled
ADP stands for:
actual deferral percentage
________ 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.
Modern portfolio theory
The classification used in the EBSA study segregated fees into the following major categories: (6) (Fee transparency)
- Set-up and conversion fees
- Recurring and administrative costs
- Communications expenses
- Investment management fees
- Distribution fees
- Mortality and expense risk fees
(3) different approaches to procuring recordkeeping services under the unbundled approach to 401(k) plan management.
- retain the recordkeeping
- through an investment advisor or broker
- use of a third-party administrator (TPA) (prevalent in small plan marketplace)
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.
bundled
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.
50% 6% salary
There are several decision elements in the initial design and ongoing administration of a 401(k) plan. Among these decision elements are: (6)
- design
- handle administrative tasks
- communicate
- fulfill fiduciary responsibilities
- control costs
- implement technology
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
- design
- operational model
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
- if employer contribution is provided, and the level
- menu of investment options
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.
NO
2%
risk averse
in order to operate a 401(k) plan, a plan sponsor must oversee a minimum of at least _____ distinct operational functions.
five
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
- employer matching contributions;
- investment options;
- Roth 401(k) deferral contributions;
- safe harbor
- automatic enrollment
- diversification
- education and investment
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)
immediately
employer contributions
three
quarterly
distinct operational functions involved in 401(k) plan management (5)
- compliance
- communication
- Investment management services
- Recordkeeping
- Directed trustee services
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