Fiduciary Responsibility & Compliance Standards Flashcards
9 cards from real CPC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 9 Fiduciary Responsibility & Compliance Standards flashcards as text
What is a fiduciary's primary duty?
Answer: Act in the participants' best interest
A fiduciary's primary duty in managing a retirement plan is to act solely in the best interest of the plan participants and beneficiaries. This 'duty of loyalty' requires fiduciaries to make decisions that prioritize the financial well-being and retirement security of those covered by the plan. They must put participants' interests above all other considerations, including their own or the employer's.
Which law defines fiduciary responsibilities for retirement plans?
Answer: ERISA
The Employee Retirement Income Security Act of 1974 (ERISA) is the federal law that explicitly defines the fiduciary responsibilities for individuals and entities involved in managing private sector retirement plans. ERISA establishes strict standards of conduct, requiring fiduciaries to act prudently, diversify investments, and operate solely in the interest of plan participants and beneficiaries. This legal framework protects retirement savings.
What action should a fiduciary take to avoid conflicts of interest?
Answer: Disclose and avoid conflicts
To uphold their fiduciary duty, individuals must proactively identify and address potential conflicts of interest. The appropriate action is to disclose any situations where personal interests might influence plan decisions and, crucially, to take steps to avoid such conflicts entirely. This ensures impartiality and protects participants' interests, maintaining the integrity of the fiduciary role.
Which best describes the 'prudent man' standard?
Answer: Act with care and diligence
The 'prudent man' standard, often referred to as the 'prudent expert' standard in ERISA, requires fiduciaries to act with the care, skill, prudence, and diligence that a prudent person familiar with such matters would use in similar circumstances. This means making informed decisions based on thorough research and professional advice, prioritizing the security and growth of plan assets for the benefit of participants.
What is a fiduciary breach?
Answer: Failing to act in participants' best interests
A fiduciary breach occurs when an individual or entity with fiduciary responsibility fails to uphold their legal and ethical duties to a retirement plan. This typically involves making decisions or taking actions that are not solely in the best interest of the plan participants and beneficiaries. Such a failure can lead to financial harm for participants, non-compliance with regulations, and potential legal consequences for the fiduciary.
How can fiduciaries demonstrate compliance?
Answer: Document decisions and processes
Fiduciaries have a legal obligation to act in the best interest of plan participants. Documenting decisions, the rationale behind them, and the processes followed provides concrete evidence of due diligence and prudent management. This record-keeping is crucial for demonstrating compliance with ERISA and other regulations, especially if challenged by regulators or participants.
What is the fiduciary's responsibility regarding plan fees?
Answer: Monitor and ensure reasonableness of fees
Fiduciaries must act prudently and solely in the interest of plan participants and beneficiaries. This includes a continuous duty to monitor and evaluate all plan fees and expenses to ensure they are reasonable for the services provided. Failing to do so can lead to breaches of fiduciary duty under ERISA, potentially resulting in legal liabilities.
What does a fiduciary need to consider when selecting plan investments?
Answer: Evaluate risk, return, and appropriateness
When selecting plan investments, fiduciaries must conduct thorough due diligence. This involves carefully evaluating the investment's risk profile, expected returns, and its overall appropriateness for the plan's objectives and participant demographics. The goal is to select investments that are prudent and diversified, aligning with the plan's investment policy statement and ERISA standards.
Who is responsible for monitoring service providers?
Answer: The fiduciary
Fiduciaries are responsible not only for selecting service providers but also for continuously monitoring their performance and adherence to the service agreement. This ongoing oversight ensures that the services remain appropriate, that fees are reasonable, and that the provider continues to meet the plan's needs. This fulfills the fiduciary's duty of prudence and loyalty to plan participants.