CPSP 2.2 Questions and Answers (100% Pass)

Investment Policy Statement A plan sponsor is not required by law to have a written investment policy statement (IPS) for its plan. However, the Employee Retirement Income Security Act of 1974 (ERISA) is clear that plans must "provide a procedure for establishing and carrying out a funding policy in a method consistent with the objectives of the plan The IPS is typically one of the first documents requested in a DOL investigation for potential fiduciary misconduct effective IPS generally includes: Master01 | October, 2024/2025 | Latest update 1 | P a g e | © copyright 2024/2025 | Grade A+ Objective and purpose of the investment policy for the plan Roles and responsibilities of key players (e.g., fiduciaries, third-party administrators, investment advisors, investment committee, etc.) Factors the plan will take into account when selecting investments Frequency and methodology for rebalancing investment portfolios Procedures for controlling and accounting for investment expenses Procedures for monitoring the investment policy on a continual basis Description of how the plan will select service providers Modern Portfolio Theory (MPT) and its tenets One of the foundational tenets of MPT is that various types of investments called asset classes perform differently depending on market conditions. Various asset classes increase or decrease in value in tandem with the overall market - and are said to therefore correlate either positively or negatively depending on the market Modern Portfolio Theory says that various asset classes may perform differently in different market conditions. MPT says Investment portfolio Master01 | October, 2024/2025 | Latest update 1 | P a g e | © copyright 2024/2025 | Grade A+ should be invested in a variety of asset classes that buffer losses in a down market and rise in an up market to drive consistent performance over time Core Asset Classes Stocks Historically, equity investments - stocks - have produced greater returns, and correlate positively, albeit with greater risk than bonds. Debt investments - bonds - traditionally negatively correlate with a down market. Generally, a larger equity percentage in a portfolio is considered more aggressive whereas a larger percentage invested in bonds, is generally considered a more conservative, less risky approach, where risk is considered to be the loss of investment principle. A general rule in evaluating portfolio risk is the ratio of equity to debt investments. That said, there are different types of stocks and bonds, which provide more opportunity to balance the portfolio between non- or low-correlated asset classes A Special Category of Stocks - Employer Securities Master01 | October, 2024/2025 | Latest update 1 | P a g e | © copyright 2024/2025 | Grade A+ Employer securities or employer stock are not, per se, an asset class; technically they are an equity investment and may, depending upon the size and type of company issuing that security, be small, mid or large cap, and a value or growth investment. Employers - most often larger, publicly-traded employers - have traditionally made those securities available as an investment option in their 401(k) plans as a way to reward and incentiv