CPC CPC Consulting Skills & Client Advisory 1 — Questions and Answers
Question 1: A CPC is advising a client on selecting between a defined benefit plan and a cash balance plan. Which factor most strongly favors a cash balance plan for a small professional services firm?
- The need for the highest possible contribution limits for older, higher-earning owners
- Simpler administration and portability of benefits for younger, mobile employees (Correct answer)
- The ability to use the cross-tested allocation formula
- Avoidance of PBGC premiums
Correct answer: Simpler administration and portability of benefits for younger, mobile employees
Cash balance plans combine DB-level tax advantages with DC-style account-based portability, making them attractive when the workforce values lump-sum flexibility over annuity payments.
Question 2: When advising a client on a plan design change, what is the CPC's first obligation?
- Recommend the design that minimizes the employer's cost
- Understand the employer's workforce goals, retirement objectives, and budget constraints before recommending any design (Correct answer)
- Recommend the design that maximizes participant benefits
- Obtain IRS pre-approval before discussing any plan design changes
Correct answer: Understand the employer's workforce goals, retirement objectives, and budget constraints before recommending any design
Effective pension consulting begins with a thorough needs assessment: understanding employer objectives, workforce demographics, budget constraints, and desired plan outcomes before recommending any design.
Question 3: A CPC is performing a plan audit in preparation for an IRS examination. Which area represents the highest risk for qualified plan disqualification?
- Minor administrative errors in investment elections
- Systematic failure to satisfy IRC Section 410(b) minimum coverage or IRC Section 401(a)(4) nondiscrimination requirements (Correct answer)
- Infrequent participant notices about investment options
- Delays in filing Form 5500 by fewer than 30 days
Correct answer: Systematic failure to satisfy IRC Section 410(b) minimum coverage or IRC Section 401(a)(4) nondiscrimination requirements
Sustained failures of minimum coverage or nondiscrimination requirements are among the most serious qualification failures and are primary audit targets because they suggest the plan benefits only highly compensated employees.
Question 4: A client asks whether to adopt a safe harbor 401(k) plan. Which statement is correct regarding the safe harbor design?
- Safe harbor plans are exempt from ADP and ACP testing but must still satisfy the top-heavy minimum contribution rules in most cases (Correct answer)
- Safe harbor plans eliminate all nondiscrimination testing including top-heavy rules
- Safe harbor plans require employer contributions of at least 5% of compensation for all eligible employees
- Safe harbor plans are only available to employers with fewer than 100 employees
Correct answer: Safe harbor plans are exempt from ADP and ACP testing but must still satisfy the top-heavy minimum contribution rules in most cases
Safe harbor 401(k) plans are exempt from ADP/ACP testing but are generally still subject to top-heavy rules unless the only employer contributions are the safe harbor contributions.
Question 5: Which scenario is most likely to benefit from a defined benefit plan paired with a profit-sharing plan (DB/DC combo)?
- A company with many young employees and a modest payroll
- A small firm with older owner-employees seeking maximum retirement contributions well above the 401(k) limit (Correct answer)
- A large corporation seeking to minimize PBGC premiums
- A startup with variable revenue and no consistent profits
Correct answer: A small firm with older owner-employees seeking maximum retirement contributions well above the 401(k) limit
DB/DC combos allow older owner-employees to maximize contributions far beyond the standalone 401(k) limits by combining the age-weighted DB contribution with DC allocations.
Question 6: A plan sponsor with 400 participants asks a CPC to benchmark their 401(k) plan fees. What should the CPC recommend as the basis for the fee evaluation?
- Compare total fees to the plan's 5-year investment returns only
- Evaluate all fees (investment, recordkeeping, advisory) relative to services received and comparable market alternatives for similar-sized plans (Correct answer)
- Focus only on investment management expense ratios
- Accept the bundled fee quoted by the plan's current provider without comparison
Correct answer: Evaluate all fees (investment, recordkeeping, advisory) relative to services received and comparable market alternatives for similar-sized plans
Fee benchmarking requires evaluating the reasonableness of all plan costs relative to the services provided and market rates for comparable plans, consistent with the fiduciary duty to pay only reasonable plan expenses.
CPC CPC Consulting Skills & Client Advisory 1
A CPC is advising a client on selecting between a defined benefit plan and a cash balance plan.
Which factor most strongly favors a cash balance plan for a small professional services firm?