Competency 18 Section 3

Question 1

1. Managed payout funds provide an alternative to single-premium immediate annuities which guarantee an income stream for life.

Answer 1

False. Managed payout funds are mutual funds and do not offer any guarantees for the payouts. (LO 18-3-1)

Question 2

2. Managed payout funds can be designed either with a specific liquidation date, or to provide income in perpetuity

Answer 2

True. (LO 18-3-1)

Question 3

3. When used by an advisor as part of a client’s retirement income strategy, managed payout funds would be more suited for meeting essential needs than for discretionary expenses.

Answer 3

False. Managed payout funds would be more suitable for assets designed to provide income for discretionary expenses, as the funds do not provide any guarantee and income may be volatile. (LO 18-3-1)

Question 4

4. Managed payout funds with relatively high payout rates are probably not designed to have payouts grow with inflation.

Answer 4

True. (LO 18-3-1)

Question 5

5. Stocks with greater liquidity tend to provide greater returns than low liquidity stocks.

Answer 5

False. Liquidity is a desirable trade which investors must pay for, and lower liquidity stocks tend to provide larger returns. (LO 18-3-2)

Question 6

6. The premium for illiquid stocks can be explained by the higher fees and transaction costs for trading them.

Answer 6

False. Research shows that a premium exists for illiquid stocks net of all such fees. (LO 18-3-2)

Question 7

7. Mutual funds holding more illiquid stocks provide inferior returns to mutual funds holding stocks with greater liquidity.

Answer 7

False. (LO 18-3-2)

Question 8

8. Asset allocation decisions explain 50% of an investor’s returns.

Answer 8

False. Asset allocation actually explains 100% of returns at an aggregate level. (LO 18-3-2)

Question 9

9. Younger investors are generally justified to have higher stock allocations than older investors because younger investors have a greater amount of human capital.

Answer 9

True. (LO 18-3-2)

Question 10

10.Guaranteed Living Withdrawal Benefit Riders for variable annuities generally do not place any cap on the maximum allowable stock allocation.

Answer 10

False. Caps are common. For instance, with the Vanguard GLWB rider, the maximum stock allocation is about 70%. (LO 18-3-3)

Question 11

11.GLWB riders are promoted as providing downside protection and upside potential, but clients must be aware that liquidity is lost and remaining assets cannot be returned.

Answer 11

False. The fact that the rider can be terminated and remaining assets returned is a common feature for such riders. (LO 18-3-3)

Question 12

12.GLWB riders generally provide only nominal protections, as opposed to real or inflation-adjusted protections.

Answer 12

True. (LO 18-3-3)

Question 13

13.One selling point for GLWBs is that they may encourage clients to adapt a more aggressive asset allocation and to stay the course after a market drop.

Answer 13

True. (LO 18-3-3)

Question 14

14.With the step-up feature to increase withdrawals whenever the contract value exceeds the benefit base, GLWB owners can expect their guaranteed income benefits to keep pace with inflation.

Answer 14

False. (LO 18-3-3)

Question 15

69. Which of the following statements regarding the design of managed payout funds is (are) correct? (LO 18-3-1)
    I. Managed payout funds can be designed with a specific liquidation date.
    II. Managed payout funds can be designed to provide income into perpetuity.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 15

69. The answer is C. Managed payout funds can be designed to liquidate on a specific date or provide income into perpetuity

Question 16

70. Which of following statements regarding stock liquidity is (are) correct? (LO 18-3-2)
    I. Changes in stock liquidity result in a change in valuation as investors want higher returns for less liquid stocks.
    II. Less liquid stocks tend to become less liquid over time and more liquid stocks tend to become more liquid.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 16

70. The answer is A. Stock liquidity changes result in valuation changes. Stocks that move from less to most liquid typically have good returns. Less liquid stocks tend to become more liquid and more liquid stocks tend to become less liquid.

Question 17

96. All of the following are true regarding managed payout fund uses for retirement income planning EXCEPT (LO 18-3-1)
    A. As a fund, it can grow the investment assets.
    B. The fund is set up to provide steady monthly payments.
    C. The fund offers liquidity as it can be sold at any time.
    D. The fund provides for minimum guaranteed returns.

Answer 17

96. The answer is D. Managed payout funds do not offer guaranteed returns. However, they might offer guaranteed payments – however, these payments might just be a return of capital

Question 18

97. All of the following are true regarding income guarantee riders EXCEPT (LO 18-3-3)
    A. Guaranteed lifetime withdrawal benefit riders for variable annuities generally do not place any cap on the maximum allowable stock allocation.
    B. Income guarantee riders offer downside protection in the form of lifetime income.
    C. Income guarantee riders offer potential upside with step-ups based on portfolio performance.
    D. Guaranteed lifetime withdrawal benefits provide lifetime income that is fixed in nominal terms.

Answer 18

97. The answer is A. Many benefit riders do place a cap on the maximum allowable stock allocation