Certified Plan Sponsor Professional (CPSP) Practice Exam

What is a common practice to enhance the effectiveness of a plan's investment strategy?

1. Investing solely in high-risk assets

2. Regularly reviewing and adjusting the investment mix

3. Limiting investment options to five funds

4. Focusing exclusively on domestic equities

The correct answer is: Regularly reviewing and adjusting the investment mix

Regularly reviewing and adjusting the investment mix is a crucial practice for enhancing the effectiveness of a plan's investment strategy. This ongoing assessment allows plan sponsors to respond to changing market conditions, evolving participant demographics, and shifting economic circumstances. By routinely evaluating the performance of investments and reassessing the risks and returns associated with them, sponsors can ensure that the strategy remains aligned with the plan's objectives and the needs of the participants. This proactive approach helps in optimizing the asset allocation, potentially leading to improved returns while managing risks effectively. In contrast, solely investing in high-risk assets without considering diversification increases the potential for significant losses and may not correspond with the risk tolerance of plan participants. Limiting investment options to just five funds could restrict participants' ability to diversify their portfolios adequately, undermining the overall effectiveness of the investment strategy. Focusing exclusively on domestic equities narrows the scope for diversification across sectors and geographical markets, potentially missing out on growth opportunities and increasing risk due to lack of exposure to global markets. Thus, a well-rounded and adaptable investment strategy that is regularly reviewed is essential for achieving optimal results.