CH 12 - Fiduciary Responsibility

Question 1

Someone is considered a fiduciary if they…(3)

Answer 1

• manage plans and assets
• can hire 3rd-party service providers or internal administrators
• actually named or called a fiduciary

Question 2

Some decisions by employers are actually business decisions and not fiduciary decisions. Such as…

Answer 2

plan setup and plan terminations

Question 3

Participant fee disclosure rules that apply to service providers, are for…

Answer 3

participant-directed individual investment (eg - 401K, etc) account plans.

Question 4

What should you keep in mind in regards to plan assets and company assets?

Answer 4

That underlying assets should NOT also be the plan assets.

Question 5

Plan assets must be contributed within a reasonable time, but should be no later than…

Answer 5

the 15th day of the following month

Question 6

Small plans have a ______ safe harbor.

Answer 6

7-business-day

Question 7

A fiduciary’s role will include…(3)

Answer 7

• discretionary administrative authority
• control/management over the disposition of the plan’s assets
• rendering investment advice

Question 8

True or False? A fiduciary is only someone named by the plan’s documents.

Answer 8

False. Fiduciaries do not necessarily have to be named.

Question 9

What are the FIVE affirmative duties of the fiduciaries?

Answer 9

• act solely in the interest of participants for exclusive purpose of providing benefits and defraying reasonable expenses
• act with the care, skill, diligence, and good judgment of a prudent person familiar with such matters
• diversify investments to minimize the risk of large losses (mutual funds)
• manage the plan in accordance with the plan and trust documents
• for individual investment accounts, provide annual info about fees and quarterly statements about fees actually charged

Question 10

Fiduciaries are not liable for participant investment decisions, however what are they responsible for?

Answer 10

investment alternatives available to participants.

Question 11

What are the 404(c) requirements for providing a broad range of investment alternatives?

Answer 11

At least three core options with materially different risk and return.

Employer stock is okay as an additional option.

Question 12

How often should employees be able to change investment choices?

Answer 12

at least quarterly

Question 13

The Pension Protection Act of 2006 protects fiduciaries with automatic enrollment. What happens if a participant fails to provide investment instructions?

Answer 13

He will have exercised control over assets (thus giving the fiduciary 404(c) protection) if the plan invests in a qualified default investment alternative.

Question 14

Who is considered a “party in interest”? (4)

Answer 14

• fiduciaries/administrators/trustees
• plan counsel/service providers
• employer, officers, directors and 10% owners
• employees and employee organizations

Question 15

What is considered a “prohibited” transactions?

Answer 15

Any loans, transfers, or the usage of plan assets

Question 16

What are the exemptions to the statutorily “prohibited” transactions?

Answer 16

• Participant loans/ESOP loans/reasonable compensation for service providers
• administrative transactions
• Individual transactions that are in interest of participants or protect rights of participants

Question 17

Fiduciary can provide investment advice without violating…

Answer 17

prohibited-transaction rules

Question 18

Fiduciary advisor fees CANNOT vary unless,…(2)

Answer 18

all advice was based on a computer model or it’s an annual audit.

Question 19

What are the THREE scenarios that a fiduciary could be liable for a transaction?

Answer 19

• personally liable for losses and profits
• liable for co-fiduciaries when knowing of participation/concealment or failing to stop another fiduciary.
• liable for allowing prohibited transaction (15% penalty tax).

Question 20

What are the FIVE ways of limiting fiduciary’s risk?

Answer 20

• document all processes
• clearly allocate responsibilities among fiduciaries in writing
• buy insurance
• employer can indemnify employees
• Don’t have a “hold harmless” provision

Question 21

An insurance plan that protects/covers fiduciaries handling a plan against losses due to fraud or dishonesty.

Answer 21

fidelity bond

Question 22

What is the minimum coverage requirement for a fidelity bond?

Answer 22

10% of the amount of funds handled, up to $500K and $1M in employer stock