Assignment 10 - Communication, Investment Advice and Other Participant Services

Question 1

• factor resulting in bad choices
• term used for putting too much emphasis on past performance as an indicator of future performance, particularly of a mutual fund

Answer 1

overweighting past performance

(factor resulting in bad choices)

Question 2

a lifecycle fund that maintains a fixed-asset allocation

in aggressive, moderate, conservative models

Answer 2

static allocation funds

Question 3

• factor resulting in inactivity on part of indiv. managing their own inv.
• overemphasize immediate desires and rewards at the expense of their L/T needs
• the tendency, when faced w/ uncertainty, to sharply reduce the importance of the future in the decision-making process
• importance of the future is just not given the weight we think it should today.

Answer 3

hyperbolic discounting

(factor of inactivity)

Question 4

the term for a person or corp. that exercises any authority or control of mgmt, disposition of assets, or admin. of a benef. plan

exp: officers, directors, inv. mgrs

Answer 4

fiduciary

Question 5

**the practice involves a requirement that an indiv. must become a plan member when initially elig. unless the indiv. files a request to be excluded from the plan (opting out)

**need default investment option (QDIA)

Answer 5

automatic enrollment

Question 6

**an inv. fund that is invested based on the anticipated retirement date

• asset allocation changes as it approaches set retirement date
• retire near future = invested in bond funds
• retire in 40 years = invested in equity funds

Answer 6

targeted maturity funds

target retirement date

(life cycle funds)

Question 7

• why participants don’t behave as rational ppl should or at least how we think they should
• use scientific research techniques to understand social, cognitive and emotional biases that affect econ. decision making
• indiv. make decisions w/ incomplete info, likey to be influenced by the way the decision is presented, and make suboptimal choices as a result

1. heuristics
2. framing
3. mkt inefficiences

Answer 7

Behavioral Finance

Question 8

belief that ppl will follow their “rules of thumb” or shortcuts or “old wives tales” w/o rationally analyzing them

decisions often fall short of the optimal positive determinations suggested

Answer 8

Heuristics

(behavioral finance)

Question 9

belief that the way that something is positioned, or the setting can influence the behavior (decision)

outcome then is less than optimal

decisions appear to be more susceptible to manipulation

Answer 9

Framing

(behavioral finance)

Question 10

belief in explanations that address why we don’t follow the path that mkt efficiency would dictate

Answer 10

Market Inefficiencies

(behavioral finance)

Question 11

1. Loss-averse
2. hyperbolic discounting
3. procrastination
4. status quo bias
5. complexity
6. choice overload

Answer 11

Factors of inactivity

Question 12

1. bounded rationality
2. overweighing past performance
3. savings anchors
4. investor overconfidence
5. peer influence
6. inapprop. risk disctng
7. disposition effect

Answer 12

Factors resulting in Bad Choices (suboptimal active choices)

Question 13

**for example = ER Stock

• factor resulting in bad choices
• investors underestimate the risk of certain inv.
• EEs figure that they know the comp.
• think it will always will even if the industry doesn’t
• that isn’t necessarily true.

Answer 13

inapprop. risk discounting

(factor resulting in bad choices)

Question 14

• factor resulting in bad choices
• an effective way to avoid facing the reality that there is a loss in the inv. - until i sell it, there is a chance it will come back.
• opposite = unwillingness to sell a winner

Answer 14

Disposition Effect

(factor resulting in bad choices)

Question 15

ways to evaluate lifecycle/targeted retirement date funds

Answer 15

• retirement age groupings - most common is 5 years
• asset allocation - at each age group
• flight plan/glide path - over time, how does the plan change asset allocation
• retirement - what then happens to fund asset allocation

Question 16

fiduciary has duty to discharge all responsiblities solely in the int. of the partic. and benef.

w/ care, skill, prudence and diligence that a prudent person who is familiar w/ such matters would use under the circumstances then prevailing

Answer 16

Prudent Expert Rule

Question 17

• trans. b/w plan and party in interest or a disqualified person
• sale, exchg or leasing of prop.
• lending money
• furnishing goods, servies
• transfer or use of plan assets
• acquisition of ER securities beyond set limits

Answer 17

prohibited transactions

Question 18

• any plan fiduciary
• person providing serv. to plan
• any ER or EE org. whose EEs/members are covered by plan
• direct or indirect owner of 50% or more of ER
• relative of any of the above
• officer, director
• person having 19% or more ownership interest in any of the preceding
• EE is a party-in-interest, not a disqualified person

Answer 18

disqualified person

Question 19

(2) types of lifecycle funds

Answer 19

1. static allocation
2. target retirement date

Question 20

1. diversified fund
2. no ER securities
3. no penalty for transfer out of QDIA
4. must be:

• target date or life cycle fund
• level of risk appropriate for partic. of plan as a whole (balanced fund)
• individually managed acct based on partic’s age, retirement date, or life expectancy

Answer 20

qualifed default inv. alternative (QDIA)

Question 21

(3) objectives for EE benef. comm

Answer 21

1. adhere to rptg and discl. requirements
2. support EE benef. cost-containment strategies
3. support HR recruitment and retention objs.

Question 22

responsibilities of a fiduciary

Answer 22

• discharge all duties solely in interest of partic. and benef. for exclusive purpose of providing plan benefits.
• prudent expert rule
• diversify inv. to min. risk of large losses
• must conform w/ docs governing the plan
• must invest only in assets subj. to the jurisdiction of U.S. courts

Question 23

(4) types of inv-related information that ERs can provide w/o fear of fiduciary liability

Answer 23

1. general plan provisions
2. general fin. and inv. info
3. asset alloc. models
4. interactive inv. material

Question 24

• factor resulting in inactivity on part of indiv. managing their own inv.
• indiv. suffer more remorse as a result of losses than they experience satisfaction or pleasure for thier gains
• don’t rate gains and losses equally, on avg
• therefore, it is a challenge from the start to convince indiv. to save for retirement due since they are more concerned with the current losses than the buildup of retirement funds

Answer 24

loss - averse

(type of inactivity)

Question 25

• factor resulting in inactivity on part of indiv. managing their own inv.
• delay making decisions and have difficulty once they delay a decision to take action to chg their course or direction

Answer 25

procrastination and inertia

(type of inactivity)

Question 26

• factor resulting in bad choices
• odds against making optimal choices are formidable due to limitations regarding their mental capabilities

Answer 26

Boudned rationality

(factor resulting in bad choices)

Question 27

auto-enrollment features address these issues

Answer 27

• low deferral rates by NHCEs
• non-defferal by new EEs
• non-deferral by current EEs
• difficulty in passing the ADP/ACP test