Chapter 18



Chapter 11

Qualified Plan Investments

LEARNING OBJECTIVES:

• Identify key factors relating to qualified plan investments

• Have a basic understanding of fiduciary requirements for qualified plans

REVIEW:

This chapter begins by discussing fiduciary requirements of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). Space is given to definitions and duties of fiduciaries. Prohibited plan transactions are covered next, followed by a brief discussion of unrelated business taxable income (UBTI). A broader section follows, covering investment policy and strategy. Types of investment vehicles are briefly discussed within this section. The chapter closes with a short section on social effects, using the financial clout of the plan to impact social and/or corporate policy.

Chapter Outline:

I. Fiduciary Requirements of ERISA and the Internal Revenue Code

II. Prohibited Transactions

III. Unrelated Business Income

IV. Investment Policy

A. Investment Vehicles

V. Investment Strategy

VI. Social Effects

VII. Chapter Endnotes

FEATURED TOPICS:

ERISA and IRC Fiduciary Requirements

Plan Investment Policy and Strategy

CFP® CERTIFICATION EXAMINATION TOPIC:

Topic 66: Investment considerations for retirement plans

A. Suitability

B. Time horizons

C. Diversification

D. Fiduciary considerations

E. Unrelated Business Taxable Income (UBTI)

COMPETENCY:

Upon completion of this chapter, the student should be able to:

1. Identify key factors relating to qualified plan investments

2. Have a basic understanding of fiduciary requirements for qualified plans

KEY WORDS:

Internal Revenue Code

Party-in-interest

Disqualified person

Unrelated business income

Investment policy

DISCUSSION:

1. Discuss qualified plan fiduciary requirements along with the duties and impact of being named a plan fiduciary.

2. Discuss types of investments that may be appropriate for use in qualified plans. Contrast these with investments that may not be appropriate.

QUESTIONS:

1. The fiduciary responsibility net includes any person who:

(1) exercises any discretionary authority or control over plan management

(2) exercises any control over plan asset management

(3) renders investment advice for compensation

(4) has discretionary authority or responsibility in plan administration

 

a. (1) only

b. (1) and (2) only

c. (1), (2), and (3) only

d. (1), (2), (3), and (4)

Chapter 11, p. 107

2. Which one of the following best identifies the term used to identify a fiduciary’s general investment responsibility?

a. prudent man requirement

b. trusted advisor requirement

c. diversification requirement

d. investment policy requirement

Chapter 11, p. 108

3. In general terms, a number of transactions are prohibited between the plan and a number of people, including: a fiduciary, a person providing service to the plan, an employer, owner, or employee organization. Which one of the following correctly identifies the term used to describe these people?

a. employee-in-general

b. owner of a 5% or more interest

c. party-in-interest

d. a Department of Labor administrator

Chapter 11, p. 109

4. Which one of the following is the term used to identify income of a tax-exempt organization that may be subject to taxation?

a. loan to an Employee Stock Ownership Plan (ESOP)

b. unrelated business taxable income

c. prohibited transaction exclusion

d. specific statutory exemption

Chapter 11, pp. 109, 110

ANSWERS:

1. d

2. a

3. c

4. b

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