Assignment 8 - 401K Practice Issues

Question 1

All provided by a single provider:

• recordkeeping
• trustee
• inv.
• mgmt
• communication services

Answer 1

bundled services

Question 2

processing inv. orders, safe-keeping assets

- not responsible for making inv. decisions

Answer 2

Directed trustee responsibility

also called non-discretionary trustee

Question 3

instructs risk-adverse investors on a method to construct portf. to optimize or maximize expected return based on given level of market risk

Answer 3

modern portf. theory

Question 4

(4) steps in portfolio selection

Answer 4

1. security valuation
2. asset allocation
3. portf. optimization
4. perf. measurement

Question 5

looks at the human tendancies to make irrational inv. decision

Answer 5

behavioral finance inf.

Question 6

thoughtful approach regarding the portab. and transferability b/w providers of 401K plans and IRAs

Answer 6

distribution planning

Question 7

ability of plan sponsors and plan participants to easily and accurately identify the fee that are being charged against their plans.

Answer 7

fee transperancy

Question 8

(6) categ. of fees

Answer 8

1. set up and conversion fees
2. recurring and admin costs
3. comm. expenses
4. inv. mgmt fees
5. distrib. fees
6. mortality fees

Question 9

(3) most critical elements for plan to meet objectives

Answer 9

1. will ER provide ER contribs.
2. the level of ER contrib.
3. menu of inv. options offered

Question 10

(5) operational functions in 401K plan mgmt

Answer 10

1. plan compliance
2. plan comm.
3. inv. mgmt services
4. recordkeeping services
5. directed trustee services

Question 11

Plan Compliance
(operational function in 401K plan mgmt)

Answer 11

• ERISA and IRC = comply w/ to retain tax-qualified status
• IRS and DOL
• assures plan conforms w/ legal requirements
• must conduct certain ongoing admin. functions

Question 12

foundational features for 401K plans

Answer 12

• offering ROTH?
• level of ER matching contribs.
• # / type of inv. options
• adopt safe harbor plan?
• automatic enrollment?
• how plan provides for adequate inv. diversif.
• means by which inv. edu. and inv. advice will be provided

Question 13

theory describing the periodically rebalancing of the portf. in order to maintain a L/T goal for asset allocation

Answer 13

strategic asset allocation

Question 14

how can plan sponsors comply w/ nondiscrim testing requirements

Answer 14

1. engage in normal means of testing involving the exam. of each partic’s deferrals
2. utilize the safe harbor plan designs where the ER uses either formulaic plan matches or nonelective contribs.
3. implementing formulaic ER matching or nonelective contribs. in conjunction w/ an automatic enrollment feature

Question 15

one-time costs arising in the establ. of 401K plan at inception or conversion

Answer 15

Set-up and conversion fees

Question 16

fees associated with:
trustee services
recordkepping
compliance
distrib. of acct proceeds to departing partic. 
loan processing 
w/drawals

Answer 16

Recurring and admin costs

Question 17

fees: (the largest of them all)
- compensate provider who recommends the allocation of funds flowing into a particular 401K plan inv. option
- research that supports buy/sell options
- compensates mutual fund mgr for pro-rata operating expenses of the fund.

Answer 17

Inv. Mgmt fees