Financial Planning & Investment Strategies Flashcards

Which investment vehicle is most tax-efficient for holding bonds within a pension plan's trust?

Answer: Taxable corporate bonds

Since pension trusts are already tax-exempt, taxable corporate bonds are preferred over municipals, which offer lower pre-tax yields in exchange for tax exemption already not needed.

A plan's asset allocation study reveals that increasing the allocation to real estate from 5% to 10% improves the efficient frontier. This conclusion is primarily supported by:

Answer: Its historical low correlation with stocks and bonds

Real estate improves the efficient frontier because its historically low correlation with stocks and bonds reduces portfolio volatility for a given return level.

A pension plan's policy benchmark is 60% Russell 3000 / 40% Bloomberg U.S. Aggregate. Which report would show whether the plan's actual allocation drifted from this target?

Answer: Asset allocation compliance report

An asset allocation compliance report compares the plan's actual holdings against IPS policy weights, identifying drift requiring rebalancing.

ESG (Environmental, Social, and Governance) factors may be considered in pension investing when they:

Answer: Are economically relevant material risks that affect risk-adjusted returns

Under DOL guidance, ESG factors may be considered only when they are material financial factors affecting risk and return — not as non-financial social objectives.

Which scenario BEST demonstrates sequence-of-returns risk for a retiree drawing from a pension plan?

Answer: Experiencing large losses in early retirement years followed by gains in later years

Sequence-of-returns risk is greatest when large losses occur early in the distribution phase, as they deplete principal before markets recover.

A pension consultant calculating the plan's required rate of return should primarily consider:

Answer: Projected benefit payments, contribution levels, and current funded status

The required return is derived from actuarial projections of benefit cash flows, anticipated contributions, and the gap created by the current funded ratio.

An endowment-style investment approach (Yale model) applied to a pension plan would most likely emphasize:

Answer: Heavy allocation to illiquid alternatives like private equity, real assets, and hedge funds

The endowment model prioritizes illiquid alternative investments to capture illiquidity and complexity premiums over traditional stock-bond portfolios.