Certified Plan Sponsor Professional (CPSP) Practice Exam

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What economic factor affects the salary deferral contribution limits?

Unemployment rates
Inflation indexing
Stock market performance
Consumer price index

The correct answer is: Inflation indexing

The salary deferral contribution limits for retirement plans, such as 401(k) plans, are adjusted periodically to reflect changes in economic conditions, particularly inflation. Inflation indexing is a method that allows for increases in contribution limits to maintain the purchasing power of money over time. As the cost of living rises due to inflation, these limits are typically increased to ensure that individuals can save an adequate amount for retirement without losing out due to the diminishing value of currency. This is essential because stagnant contribution limits might restrict individuals' ability to save adequately in real terms, negatively impacting their retirement planning. While other economic factors such as unemployment rates, stock market performance, and the consumer price index may influence the overall economic landscape or individual financial decisions, they do not directly impact the mechanisms through which salary deferral limits are adjusted. Inflation indexing focuses specifically on adjusting limits to account for inflation trends, making it the correct choice in this context.