Certified Plan Sponsor Professional (CPSP) Practice Exam

How can plan sponsors limit their fiduciary responsibility regarding participant investment decisions?

1. By providing a limited range of investment options.

2. By ensuring compliance with 404(c) requirements.

3. By advising participants on financial matters.

4. By outsourcing all investment decisions to a third party.

The correct answer is: By ensuring compliance with 404(c) requirements.

The correct choice is rooted in the guidelines set forth in Section 404(c) of the Employee Retirement Income Security Act (ERISA). When plan sponsors ensure compliance with these requirements, it allows them to limit their fiduciary liability regarding the investment decisions made by plan participants. Section 404(c) provides a safe harbor for plan sponsors, indicating that if certain conditions are met, they are not liable for any losses that may occur due to participants' investment decisions. This means that as long as the plan provides participants with a sufficient number of investment options, the ability to make their own investment choices, and meets the required disclosure and education guidelines, plan sponsors can shift much of the responsibility for investment outcomes to the participants themselves. This method of compliance alleviates some burden from the plan sponsors while still fulfilling their obligations to offer a prudent investment framework for participants. Therefore, focusing on 404(c) compliance is a strategic and legally recognized way for plan sponsors to limit their fiduciary responsibility related to participant investment decisions.