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CPFA EXAM NEWEST ACTUAL EXAM TEST
BANK
NAPA (CERTIFIED PLAN FIDUCIARY ADVISOR)
CERTIFICATION EXAM PREP
Verified Questions & Answers | Complete Study Guide |
A+ Grade
Content Areas: Fiduciary Roles & Responsibilities, Non-Fiduciary Service Providers, Plan Governance & Documentation, Fiduciary Oversight, Plan Goals & Objectives, Participant Outcomes, Service Provider Selection, Educating Fiduciaries on Plan Investments, Investment Policy Statement, Plan Investment Oversight, Liaison Services, Retirement Plan Committee & Fiduciary Training, Conversions Primary References: NAPA CPFA Exam Content Outline, ERISA, DOL Regulations, Betterment Advisor Solutions
SECTION 1: FIDUCIARY ROLES &
RESPONSIBILITIES (Questions 1-40)
Q1. Under ERISA, a person is considered a fiduciary to a plan to the extent that they: A) Provide administrative services to the plan B) Exercise discretionary authority or control over plan management or assets, render investment advice for compensation, or have discretionary authority over plan administration C) Are employed by the plan sponsor D) Receive compensation from the plan Answer: B Rationale: ERISA defines a fiduciary functionally, not by title. A person becomes a fiduciary to the extent they exercise discretionary authority or control over plan management or assets, render investment advice for compensation, or have discretionary authority over plan administration. This functional definition means de facto fiduciary status can arise even without a formal agreement. Q2. What are the core fiduciary duties under ERISA? A) Maximize profits for the plan sponsor B) Act solely in the interest of participants and beneficiaries, act prudently, follow plan documents, diversify investments, and pay only reasonable expenses C) Minimize plan expenses at all costs D) Ensure all participants achieve the same retirement outcome Answer: B
Answer: B Rationale: The duty of prudence requires fiduciaries to act with the care, skill, and diligence of a prudent person familiar with the matters. Prudence focuses on the process for making fiduciary decisions—it is wise to document decisions and the basis for those decisions. The outcome matters less than the process used to reach the decision. Q5. If a fiduciary lacks the required expertise to make an informed decision, they should: A) Make the best guess possible B) Hire someone with that professional knowledge C) Avoid making the decision entirely D) Defer to the plan sponsor Answer: B Rationale: Fiduciaries need to have the requisite skill and ability to "dig in" that a person who lives in the particular space would have. If a fiduciary lacks that requisite skill, they have to obtain it, which could include calling in an adviser or investment managers who have more investment experience. Q6. The duty to diversify plan investments requires fiduciaries to: A) Offer a single investment option for simplicity B) Offer a range of investment options designed to help participants meet retirement needs while minimizing the risk of large losses
C) Invest only in low-risk government securities D) Provide the same investment options to all participants Answer: B Rationale: The duty to diversify requires fiduciaries to offer a range of investment options designed to help participants meet their retirement investment needs while minimizing the risk of large losses. In designing an appropriate investment lineup, fiduciaries should have a variety of different asset classes available. Q7. What is the difference between a 3(21) fiduciary and a 3(38) fiduciary? A) A 3(21) has full discretion; a 3(38) provides advice only B) A 3(21) provides recommendations but the plan sponsor retains final decision-making authority; a 3(38) assumes full discretionary authority over plan assets C) Both have the same responsibilities D) A 3(21) handles administration; a 3(38) handles investments Answer: B Rationale: A 3(21) fiduciary is a co-fiduciary who provides investment recommendations, but the plan sponsor retains final decision-making authority and liability. A 3(38) fiduciary is an investment manager who assumes full discretionary authority over plan assets, selecting, implementing, and replacing funds without requiring sponsor approval for each change.
Q10. A 3(21) fiduciary is best suited for a plan sponsor that: A) Has limited internal investment expertise B) Wants to transfer all investment liability away from the sponsor C) Has an active investment committee with sufficient expertise to evaluate recommendations D) Prefers minimal involvement in investment decisions Answer: C Rationale: A 3(21) structure works best when the sponsor has an active investment committee with sufficient expertise to evaluate recommendations, strong governance infrastructure (documented meetings, current IPS), and wants an engaged advisory relationship while retaining control. Q11. A 3(38) fiduciary is best suited for a plan sponsor that: A) Has an active investment committee B) Has limited internal investment expertise and wants to minimize personal fiduciary exposure C) Wants to retain decision-making authority D) Has strong internal investment resources Answer: B
Rationale: A 3(38) fiduciary structure works best when the sponsor has limited internal investment expertise or a small, informal committee, and the sponsor's primary goal is to minimize personal fiduciary exposure. Q12. The exclusive purpose rule under ERISA requires that fiduciaries act: A) For the benefit of the plan sponsor B) For the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses C) To maximize the plan sponsor's profits D) To minimize participant contributions Answer: B Rationale: The exclusive purpose rule requires fiduciaries to act for the exclusive purpose of providing benefits to plan participants and their beneficiaries, and defraying reasonable expenses of the plan. It prohibits using plan assets for unrelated objectives. Q13. A person can become a de facto fiduciary under ERISA even if: A) They have no formal written agreement B) They have explicitly declined fiduciary status C) They are not paid for their services D) They are a plan participant Answer: A
plan or its assets C) Receive compensation from the plan D) Are named in the plan document Answer: B Rationale: ERISA Section 3(21)(A)(i) provides that a person is a fiduciary with respect to a plan to the extent that they exercise discretionary authority or control respecting management of the plan or disposition of its assets. This is a functional test based on actions, not titles. Q16. Fiduciaries who fail to fulfill their duties may face: A) No consequences B) Civil penalties, excise taxes, and personal liability for civil lawsuits C) Only criminal penalties D) Only warnings from the DOL Answer: B Rationale: Fiduciaries who fail to fulfill their duties face severe penalties. The DOL and IRS may impose civil penalties and excise taxes, and plan fiduciaries may personally face civil lawsuits and criminal penalties. Q17. Which of the following is a fiduciary responsibility under ERISA? A) Paying only reasonable plan expenses B) Minimizing participant contributions
C) Maximizing plan sponsor profits D) Offering only low-cost investment options Answer: A Rationale: Fiduciary responsibilities include acting solely in the interest of participants, acting prudently, following plan documents, diversifying investments, and paying only reasonable plan expenses. Q18. The duty to follow plan documents requires fiduciaries to: A) Follow plan documents unless inconsistent with ERISA B) Follow plan documents at all times without exception C) Follow plan documents only when convenient D) Ignore plan documents if they seem outdated Answer: A Rationale: Fiduciaries are required to follow the terms of the plan documents (assuming the plan complies with applicable law) and need to make sure they understand its terms and conditions. Q19. Co-fiduciary liability under ERISA means: A) Each fiduciary is only liable for their own actions B) A plan can have multiple fiduciaries with overlapping responsibilities, and each is liable for their own breaches and, in some cases, for the breaches of others they knowingly allow
A) Proxy voting is not a fiduciary function B) Fiduciaries may use proxy voting to further political and social causes C) Votes shall be cast only in accordance with a plan's economic interests, and fiduciaries must consider only factors that relate to the economic value of the plan's investment D) Proxy voting decisions are not subject to ERISA fiduciary duties Answer: C Rationale: IB 2008-02 stated that votes shall be cast only in accordance with a plan's economic interests, and that the responsible fiduciary shall consider only those factors that relate to the economic value of the plan's investment. Use of plan assets to further political or social causes that have no connection to enhancing economic value is a violation. Q22. If a fiduciary determines that the cost of voting a proxy is likely to exceed the expected economic benefits: A) They must vote anyway to fulfill their duty B) They have an obligation to refrain from voting C) They must hire a proxy advisory firm D) They must poll participants on how to vote Answer: B Rationale: If the responsible fiduciary reasonably determines that the cost of voting (including the cost of research) is likely to exceed the expected economic benefits of voting, the fiduciary has an obligation to refrain from voting.
Q23. Under ERISA, investment advice becomes fiduciary advice when the advisor: A) Provides general educational information B) Renders advice on a regular basis, pursuant to an agreement, that serves as a primary basis for investment decisions, and is individualized based on the particular needs of the plan C) Provides a list of investment options D) Discusses general market trends Answer: B Rationale: The five-part test for investment advice fiduciary status requires: (1) rendering advice as to the value of securities or recommendations; (2) on a regular basis; (3) pursuant to an agreement; (4) that the advice will serve as a primary basis for investment decisions; and (5) that the advice will be individualized based on the particular needs of the plan. Q24. Which of the following is NOT a fiduciary duty under ERISA? A) Duty of loyalty B) Duty of prudence C) Duty to maximize investment returns regardless of risk D) Duty to diversify plan investments Answer: C
Rationale: A named fiduciary is one who is specifically identified in the plan document or through a procedure in the document. If a plan official named in the document changes, the plan document must be updated to reflect that change. Q27. The "Prudent Expert Rule" in ERISA requires that fiduciaries: A) Be experts in all areas of finance B) Act with the care, skill, prudence, and diligence of a prudent person familiar with such matters C) Hire only investment experts D) Avoid all investment risk Answer: B Rationale: The prudent expert rule requires fiduciaries to act with the care, skill, prudence, and diligence with which a prudent person, well-versed in the matters at hand, would exercise under the circumstances. Q28. When monitoring a service provider, fiduciaries should: A) Review performance, check actual fees charged, ask about policies and practices, and follow up on participant complaints B) Only review fees once a year C) Trust that the provider is acting appropriately D) Outsource all monitoring responsibilities Answer: A
Rationale: The DOL noted areas for plan sponsors to consider including evaluating notices received, reviewing service provider performance, reading reports, checking actual fees charged, asking about policies and practices (such as trading, investment turnover, and proxy voting), and following up on participant complaints. Q29. A fiduciary's duty to pay only reasonable plan expenses means: A) All plan expenses must be paid by participants B) Plan expenses must be reasonable in relation to the services provided and the size of the plan C) The plan should pay the lowest possible fees regardless of service quality D) Expenses must be approved by all participants Answer: B Rationale: Fiduciaries must pay only reasonable plan expenses. This means expenses must be reasonable in relation to the services provided and the size of the plan. The duty requires fiduciaries to ensure plan assets are not used for unreasonable or unnecessary expenses. Q30. Which of the following best describes the relationship between a 3(21) advisor and a plan sponsor? A) The advisor acts alone and the sponsor has no role B) The advisor recommends and the sponsor decides
A) Selecting plan investment options B) Processing participant contributions and maintaining records C) Determining plan fees D) Making investment recommendations Answer: B Rationale: Non-fiduciary service providers perform ministerial functions such as processing contributions, maintaining records, and providing participant statements. These functions do not involve discretionary authority over plan assets or management. Q33. A plan sponsor should update its plan document when: A) The investment menu changes B) A plan official named in the document changes C) Participant contributions increase D) The stock market fluctuates Answer: B Rationale: If a plan official named in the document changes, the plan document must be updated to reflect that change. The plan document serves as the foundation for plan operations and should be periodically reviewed to ensure it remains current. Q34. The Department of Labor's elaws ERISA Fiduciary Advisor is a resource that:
A) Certifies plan fiduciaries B) Provides guidance on fiduciary responsibilities under ERISA C) Investigates fiduciary breaches D) Approves plan investments Answer: B Rationale: The elaws ERISA Fiduciary Advisor is an online resource from the DOL that provides guidance on fiduciary responsibilities under ERISA, including acting solely in the interest of participants, acting prudently, following plan documents, diversifying investments, and paying reasonable expenses. Q35. Which fiduciary structure transfers investment liability away from the plan sponsor? A) 3(21) co-fiduciary B) 3(38) investment manager C) 3(16) plan administrator D) 3(34) investment advisor Answer: B Rationale: A 3(38) fiduciary is a discretionary investment manager who assumes full discretionary authority and liability for investment decisions. The sponsor is relieved of liability for the investment choices made by the 3(38) manager, though the sponsor still retains the duty to prudently select and monitor the manager.
