PFS Reading & Literacy Support 2 — Questions and Answers
Question 1: A client brings in a multi-page annuity contract and asks which section describes the surrender charge schedule. Which document-reading strategy is most efficient?
- Read the contract front to back
- Scan the table of contents or index for 'surrender charges' (Correct answer)
- Ask the insurance company to summarize it verbally
- Read only the first and last paragraphs
Correct answer: Scan the table of contents or index for 'surrender charges'
Using the table of contents or index allows quick navigation to the relevant section without reading the entire contract.
Question 2: When reviewing a prospectus, a client encounters the phrase 'net expense ratio.' What does this term mean in the context of mutual funds?
- The fund's total assets minus liabilities
- The annualized cost of owning the fund expressed as a percentage of assets (Correct answer)
- The difference between gross and net returns
- The ratio of operating income to revenue
Correct answer: The annualized cost of owning the fund expressed as a percentage of assets
The net expense ratio reflects the total annual cost charged to fund investors, expressed as a percentage of average net assets.
Question 3: A PFS is helping a financially inexperienced client read their 401(k) statement. The statement shows 'vested balance' vs. 'total balance.' What should the PFS explain?
- Both figures are always equal after one year of employment
- The vested balance is the portion the employee owns outright, regardless of leaving the employer (Correct answer)
- The total balance includes only employee contributions
- The vested balance excludes employee contributions
Correct answer: The vested balance is the portion the employee owns outright, regardless of leaving the employer
The vested balance is the amount the employee has earned the right to keep, including any employer contributions that have vested per the plan schedule.
Question 4: A client asks what 'in perpetuity' means in a charitable remainder trust document. Which interpretation is correct?
- For a fixed term of 20 years
- Lasting indefinitely, with no set end date (Correct answer)
- Until the trust corpus is depleted
- Until the income beneficiary reaches age 70½
Correct answer: Lasting indefinitely, with no set end date
'In perpetuity' means lasting forever or without a defined termination date.
Question 5: When reading a defined benefit plan summary, a client sees the term 'normal retirement age.' What does this typically signify?
- The age at which Social Security benefits begin automatically
- The plan-specified age at which full pension benefits are payable without reduction (Correct answer)
- The IRS-mandated age for required minimum distributions
- The earliest age an employee can contribute to the plan
Correct answer: The plan-specified age at which full pension benefits are payable without reduction
Normal retirement age in a pension plan is the age set by the plan at which a participant qualifies for unreduced retirement benefits.
Question 6: A client receives a mortgage disclosure with an 'APR' that is higher than the stated interest rate. How should a PFS explain this discrepancy?
- The lender made a calculation error
- APR includes fees and other costs, making it higher than the nominal interest rate (Correct answer)
- APR reflects only the principal repayment schedule
- The stated rate applies to the first year only
Correct answer: APR includes fees and other costs, making it higher than the nominal interest rate
APR (Annual Percentage Rate) incorporates fees, points, and other loan costs into the effective annual rate, making it higher than the simple interest rate.
Question 7: A client reads a trust document that names them as a 'remainder beneficiary.' What does this designation mean?
- They receive income distributions during the trust's term
- They inherit the trust assets after the income beneficiary's interest ends (Correct answer)
- They are the trustee responsible for administration
- They must pay estate taxes on the trust assets
Correct answer: They inherit the trust assets after the income beneficiary's interest ends
A remainder beneficiary receives the trust's remaining assets after the income interest or other conditions of the trust have been fulfilled.
PFS Reading & Literacy Support 2
A client brings in a multi-page annuity contract and asks which section describes the surrender charge schedule.
Which document-reading strategy is most efficient?