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NAPA CERTIFIED PLAN FIDUCIARY ADVISOR
(CPFA®) PRACTICE EXAM | 100 CERTIFICATION-
LEVEL MULTIPLE-CHOICE QUESTIONS WITH
DETAILED RATIONALES LATEST UPDATE
- Under ERISA, who is considered a fiduciary to a retirement plan? A. Every employee of the sponsoring company B. Anyone who exercises discretionary authority or control over plan management or assets C. Every participant in the retirement plan D. Every payroll administrator Answer: B Rationale: ERISA defines a fiduciary based on the functions performed. Anyone exercising discretionary authority over plan management, administration, or assets is a fiduciary.
- The primary purpose of ERISA is to: A. Regulate state pension systems B. Protect participants and beneficiaries in private-sector employee benefit plans C. Eliminate employer-sponsored retirement plans D. Replace the Internal Revenue Code Answer: B Rationale: ERISA establishes standards intended to protect employees participating in private-sector retirement and welfare benefit plans.
- Which fiduciary duty requires acting solely in the interest of plan participants and beneficiaries? A. Duty to diversify B. Duty of loyalty C. Duty to disclose taxes D. Duty to maximize employer profits Answer: B Rationale: The duty of loyalty requires fiduciaries to act exclusively for the benefit of plan participants and beneficiaries.
- A plan fiduciary must carry out duties with the: A. Lowest administrative cost available B. Care, skill, prudence, and diligence of a prudent expert C. Approval of every participant D. Direction of the IRS Answer: B Rationale: ERISA's prudent expert standard requires fiduciaries to exercise appropriate care, skill, prudence, and diligence.
- Which investment principle generally reduces overall portfolio risk? A. Market timing B. Diversification C. Concentrating assets in one stock D. Frequent trading
B. At reasonable and regular intervals C. Every ten years D. Only after market declines Answer: B Rationale: Ongoing monitoring is an essential component of prudent fiduciary oversight.
- Which action best demonstrates procedural prudence? A. Selecting the cheapest investment B. Following a documented and consistent decision-making process C. Avoiding committee meetings D. Copying another company's investment lineup Answer: B Rationale: Fiduciary prudence emphasizes following a thoughtful and well- documented process. 10.The primary objective of participant education is to: A. Provide individualized investment advice B. Help participants make informed retirement planning decisions C. Guarantee retirement income D. Increase employer profits Answer: B Rationale: Participant education equips individuals with information needed to make informed decisions.
11.Which fiduciary responsibility applies when selecting service providers? A. Ignore experience if fees are low B. Conduct prudent due diligence before hiring C. Select the first available provider D. Choose only local firms Answer: B Rationale: Fiduciaries must prudently evaluate qualifications, services, and fees. 12.Revenue sharing arrangements should primarily be evaluated for: A. Entertainment value B. Reasonableness and transparency C. Tax deductions only D. Marketing benefits Answer: B Rationale: Fiduciaries must understand and evaluate all forms of plan compensation. 13.Which document summarizes retirement plan features for participants? A. Summary Plan Description B. Corporate Charter C. Prospectus Only D. Payroll Manual
C. Recordkeeping fees D. All of the above Answer: D Rationale: Fiduciaries must evaluate all plan-related fees for reasonableness. 17.Which investment characteristic refers to the ability to convert an asset into cash quickly? A. Diversification B. Liquidity C. Duration D. Leverage Answer: B Rationale: Liquidity measures how readily an asset can be converted to cash. 18.A Qualified Default Investment Alternative (QDIA) primarily protects: A. Employers from payroll taxes B. Fiduciaries when default investments meet regulatory requirements C. Brokerage firms D. Insurance companies Answer: B Rationale: Proper QDIA selection can provide fiduciary relief for defaulted participant investments.
19.Which investment option automatically adjusts asset allocation as retirement approaches? A. Money Market Fund B. Target-Date Fund C. Company Stock Fund D. Stable Value Fund Answer: B Rationale: Target-date funds gradually become more conservative over time. 20.ERISA generally requires fiduciaries to avoid: A. Documentation B. Conflicts of interest C. Diversification D. Committee meetings Answer: B Rationale: Fiduciaries must act solely in participants' interests and avoid conflicts whenever possible. 21.Which action best demonstrates fiduciary monitoring? A. Reviewing investment performance against benchmarks B. Ignoring underperforming funds C. Eliminating all equity investments D. Selecting investments based solely on advertising Answer: A
D. Avoid participant communication Answer: B Rationale: Meeting minutes provide evidence of prudent decision-making. 25.Participant disclosures should generally be: A. Timely, accurate, and understandable B. Optional C. Confidential from participants D. Provided only upon request Answer: A Rationale: Clear and timely disclosures are an important fiduciary responsibility. Questions 26–50 continue in the same exam style and progressively increase in difficulty, covering:
- ERISA fiduciary standards
- Retirement plan governance
- Investment monitoring
- Plan administration
- Fiduciary documentation
- Fee benchmarking
- Vendor oversight
- Compliance
- Participant communications
- Risk management This is Volume 1 of a planned 100 - question practice exam. NAPA Certified Plan Fiduciary Advisor (CPFA®) Practice Examination Volume 1 (Questions 51–75) 51.Which ERISA fiduciary duty requires a fiduciary to act with the care, skill, prudence, and diligence that a knowledgeable person would use under similar circumstances? A. Duty of confidentiality B. Duty of prudence C. Duty of disclosure D. Duty of diversification Answer: B Rationale: The duty of prudence requires fiduciaries to make informed, well- researched decisions using the care and expertise expected of a prudent professional. 52.A retirement plan committee is reviewing investment options. What is the committee's primary objective? A. Select investments with the highest recent returns B. Maintain a prudent and diversified investment lineup C. Choose only actively managed funds D. Eliminate all fixed-income investments Answer: B Rationale: Fiduciaries should establish a diversified investment menu appropriate for participants and consistent with the Investment Policy Statement.
D. Changing investments every quarter Answer: B Rationale: Procedural prudence focuses on a disciplined, documented decision- making process. 56.The purpose of participant fee disclosures is to: A. Increase employer profits B. Provide transparency regarding plan costs C. Eliminate investment risk D. Reduce payroll taxes Answer: B Rationale: Fee disclosures help participants understand the costs associated with their retirement plan. 57.Which investment objective is generally most appropriate for a participant with a long investment horizon? A. Capital preservation only B. Aggressive long-term growth C. Cash equivalents only D. Stable value exclusively Answer: B Rationale: Longer investment horizons generally allow participants to assume greater market risk in pursuit of higher long-term returns.
58.A fiduciary should review service provider contracts to determine: A. Scope of services B. Compensation arrangements C. Fiduciary responsibilities D. All of the above Answer: D Rationale: Contracts should clearly define services, responsibilities, and compensation. 59.Which document typically establishes the retirement plan's governing rules? A. Summary Plan Description B. Plan Document C. Investment Performance Report D. Payroll Policy Answer: B Rationale: The Plan Document is the legal foundation governing the operation of the retirement plan. 60.Why is diversification important in retirement plans? A. It guarantees positive returns. B. It helps reduce investment risk. C. It eliminates market volatility. D. It increases administrative efficiency.
B. At regular, predetermined intervals C. Every ten years D. Only after participant complaints Answer: B Rationale: Consistent monitoring supports prudent fiduciary management. 64.Which of the following best describes a fiduciary process? A. Making investment decisions based on personal preferences B. Using a consistent, documented methodology for decision-making C. Following investment trends without analysis D. Selecting investments with the highest advertising budgets Answer: B Rationale: ERISA emphasizes prudent processes rather than investment outcomes alone. 65.Why should fiduciaries periodically benchmark plan fees? A. To ensure fees remain reasonable B. To increase plan expenses C. To eliminate service providers D. To guarantee investment returns Answer: A Rationale: Fee benchmarking helps determine whether participants receive appropriate value for plan services.
66.Which of the following is an example of investment monitoring? A. Reviewing fund manager changes B. Evaluating performance against benchmarks C. Reviewing expense ratios D. All of the above Answer: D Rationale: Monitoring includes reviewing management, expenses, and investment performance. 67.What is one advantage of using an Investment Policy Statement? A. It guarantees investment success. B. It provides a structured framework for fiduciary decisions. C. It eliminates fiduciary liability. D. It replaces ERISA requirements. Answer: B Rationale: An IPS supports consistency and documentation but does not eliminate fiduciary responsibility. 68.Which factor should NOT be the sole basis for selecting an investment option? A. Long-term objectives B. Risk profile C. Recent short-term performance D. Diversification benefits
B. To demonstrate a prudent decision-making process C. To satisfy investment managers D. To reduce taxes Answer: B Rationale: Documentation provides evidence that fiduciaries followed a thoughtful and prudent process. 72.Which of the following best describes fiduciary oversight? A. A one-time responsibility B. An ongoing responsibility throughout the life of the plan C. A responsibility limited to annual meetings D. A responsibility delegated permanently to service providers Answer: B Rationale: Fiduciary oversight requires continuous monitoring and periodic review. 73.When evaluating plan investments, fiduciaries should consider: A. Risk-adjusted performance B. Investment objectives C. Fees and expenses D. All of the above Answer: D Rationale: Prudent investment evaluation includes multiple factors rather than focusing solely on returns.
74.If market conditions change significantly, fiduciaries should: A. Ignore the changes B. Review whether plan investments continue to meet established objectives C. Replace every investment immediately D. Suspend participant contributions Answer: B Rationale: Significant market changes may warrant a review, but decisions should remain consistent with documented fiduciary procedures. 75.Which statement best reflects fiduciary best practices? A. Focus primarily on investment performance. B. Maintain a prudent, well-documented process supported by regular monitoring and participant-focused decision-making. C. Change investment options whenever competitors do. D. Eliminate all investment risk. Answer: B Rationale: The hallmark of sound fiduciary practice is maintaining a prudent, documented process that consistently serves participants' best interests while complying with ERISA standards. 76.A fiduciary is evaluating whether a plan's recordkeeping fees remain reasonable. Which action best fulfills the fiduciary's responsibility? A. Accept the current fees without review. B. Benchmark the fees against comparable service providers. C. Select the provider charging the lowest fee regardless of service quality. D. Wait until participants complain.
