CPC Fiduciary Responsibility & Compliance Standards 2 — Questions and Answers
Question 1: Under ERISA, which action by a plan fiduciary constitutes a prohibited transaction?
- Hiring an independent auditor to review plan finances
- Lending plan assets to a party in interest at market rates without exemption (Correct answer)
- Diversifying plan investments across multiple asset classes
- Selecting a new record-keeper through a competitive bidding process
Correct answer: Lending plan assets to a party in interest at market rates without exemption
ERISA Section 406 prohibits loans of plan assets to parties in interest unless a specific statutory or administrative exemption applies.
Question 2: The 'exclusive benefit' rule under ERISA Section 404 requires that plan assets be used:
- Primarily to reduce employer payroll costs
- Exclusively for the benefit of participants and their beneficiaries (Correct answer)
- Equally between active employees and retirees
- Only to purchase annuity contracts from insurance companies
Correct answer: Exclusively for the benefit of participants and their beneficiaries
ERISA Section 404(a)(1) mandates that fiduciaries act solely in the interest of participants and beneficiaries for the exclusive purpose of providing benefits.
Question 3: A plan fiduciary who delegates investment management to a qualified investment manager under ERISA Section 402(c)(3) is relieved of liability for:
- The initial selection of the investment manager
- Acts and omissions of the investment manager once properly appointed (Correct answer)
- Annual review of the investment manager's performance
- Ensuring the investment manager is a registered investment adviser
Correct answer: Acts and omissions of the investment manager once properly appointed
Once a named fiduciary properly appoints a qualified investment manager, the appointing fiduciary is not liable for acts or omissions of that manager.
Question 4: Which document establishes the investment guidelines and objectives that a plan's investment manager must follow?
- Summary Plan Description (SPD)
- Investment Policy Statement (IPS) (Correct answer)
- Form 5500 Schedule H
- Annual Funding Notice
Correct answer: Investment Policy Statement (IPS)
An Investment Policy Statement sets forth the plan's investment goals, risk tolerance, asset allocation targets, and manager selection criteria.
Question 5: Under ERISA's co-fiduciary liability rules, a fiduciary can be held liable for another fiduciary's breach if the first fiduciary:
- Was unaware of the other fiduciary's actions
- Knowingly participated in or concealed the breach (Correct answer)
- Resigned from their fiduciary role before the breach occurred
- Was appointed by a different plan sponsor
Correct answer: Knowingly participated in or concealed the breach
ERISA Section 405(a) imposes co-fiduciary liability when a fiduciary knowingly participates in, enables, or conceals another fiduciary's breach.
Question 6: The DOL's 'functional fiduciary' test determines fiduciary status based on:
- The job title assigned by the plan sponsor
- Whether the individual exercises discretionary authority or control over plan management or assets (Correct answer)
- The amount of compensation received from the plan
- Whether the individual is named in the plan document
Correct answer: Whether the individual exercises discretionary authority or control over plan management or assets
ERISA defines a fiduciary functionally—anyone who exercises discretionary authority over plan administration or management of plan assets is a fiduciary regardless of their title.
Question 7: When a plan fiduciary discovers that a prohibited transaction has already occurred, the most appropriate first step is to:
- Immediately terminate the service provider involved
- Seek legal counsel and consider voluntary correction through DOL programs (Correct answer)
- Remove the information from plan records to avoid penalties
- Transfer the plan to a different plan sponsor
Correct answer: Seek legal counsel and consider voluntary correction through DOL programs
The DOL's Voluntary Fiduciary Correction Program (VFCP) allows fiduciaries to correct prohibited transactions and receive a no-action letter, reducing exposure to penalties.
CPC Fiduciary Responsibility & Compliance Standards 2
Under ERISA, which action by a plan fiduciary constitutes a prohibited transaction?