TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING
11th Edition
College Course Materials
Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS®
Associate Professor
CFP® Program Director
Personal Financial Planning Department
University of Missouri-Columbia
Please Note: Correct answers for each question are indicated in bold type. After each question,
the number of the page containing information relevant to answering the question is given. When
a calculation is necessary or the reasoning behind a given answer may be unclear, a brief
rationale for the correct answer is also given.
Part A: Retirement Planning
ERISA and Tax Rules for Qualified Plans
Chapter 11: Qualified Plan Investments
True/False
11.1
Every qualified plan must identify a “named fiduciary’ in the plan document.
11.2
Fiduciary rules indicate the specific responsibilities of each person involved in designing
and maintaining a qualified plan.
11.3
Following ERISA guidelines for qualified plan investments generally results in selecting
from a rather narrow range of investment strategies.
Answers:
11.1 true [p. 107]
11.2 false [p. 107]
11.3 false [p. 111]
Multiple Choice
11.4
A ‘fiduciary’ typically includes which of the following?
a.
b.
c.
d.
e.
the employer
the retirement plan trustee
an accountant who only renders actuarial services for the retirement plan
all of the above
only a and b
Answer: E [p. 107]
11.5
Under the ‘prudent man’ rule, a fiduciary must consider
a. diversification of plan portfolio
b. liquidity and current return of the portfolio relative to the anticipated cash flow
requirements of the plan
c. the projected return of the portfolio relative to plan’s funding objectives
d. all of the above
e. only a and b
Answer: D [p. 108]
11.6
Adequate liquidity is one of several specific investment objectives in a qualified plan.
Which of the following types of assets offers the most liquidity?
a.
b.
c.
d.
e.
common stock traded on the stock market
real estate
equipment leasing
long term debt
collectibles
Answer: A [p. 110]
Application
11.7
Walter Graves, owner of Graves Excavating wants to deposit employer stock in a qualified
individual account plan. The stock is not publicly traded. Which of the following is (are)
true for Walter?
a.
b.
c.
d.
e.
ERISA limits such contributions to 10% of fair market value of the assets
employer stock will provide the qualified plan with ample liquidity
Walter could use a profit-sharing plan to accomplish his objective
a and c
b and c
Answer: C [p. 108]
11.8
Sarah Tensley, owner of Riverwood Spas, a dealer for saunas and hot tubs, installed a
qualified retirement plan in her business three years ago. Sarah’s strength is in public
relations and sales. She says “numbers make me nervous,” so she has delegated the
handling and investment of the retirement plan to a trustee.
a. Sarah has freed herself from any fiduciary responsibility, having transferred all of that
responsibility to the plan trustee
b. Sarah should be sure that her liability insurance covers any liabilities that arise out of
breech of fiduciary responsibility
c. Sarah can reimburse the plan trustee for any losses the trustee might incur as a result
of performing fiduciary duties.
d. a and b
e. b and c
Answer: E [p. 108]
11.9
Joan Garvey owns Garvey Management, a property management company. Last year,
Garvey Management installed a qualified defined benefit plan. A small portion of the plan
is invested in real estate. Joan hired Hank Thomas, an actuary, to evaluate the plan on an
annual basis. Hank’s lease in his old office space ran out and Joan offered to let him
occupy an office rent-free in one of the buildings that is in the qualified plan’s portfolio.
This arrangement would be an acceptable transaction under ERISA.
a. true
b. false
Answer: B [p. 108-109 – this arrangement would be a prohibited transaction under ERISA]
11.10 The IRS caught the plan trustee for Hopper Manufacturing violating the prohibited
transaction rules. Hopper Manufacturing:
a. must pay a initial penalty equal to 5% of the amount involved
b. must pay a 100% penalty if the transaction is not corrected within time limits set by the
IRS
c. may face penalties for breech of fiduciary responsibility
d. all of the above
e. only a and b
Answer: D [p. 109]