Certified Plan Sponsor Professional (CPSP) Practice Exam

What is a prudent practice for plan sponsors regarding investment performance?

1. To avoid reviewing performance regularly

2. To review performance against index benchmarks

3. To only focus on short-term returns

4. To solely depend on the advice of fund managers

The correct answer is: To review performance against index benchmarks

Reviewing investment performance against index benchmarks is a prudent practice for plan sponsors because it provides a clear standard for evaluating how well the fund’s investments are doing in comparison to market averages. By using benchmarks, plan sponsors can assess whether their investment strategy is on track and if it is delivering returns that meet or exceed the expected outcomes based on market conditions. This practice encourages sponsors to take a disciplined and informed approach to investment performance, ensuring that they make decisions based on data-driven insights rather than emotional responses or trends that may not reflect the underlying financial realities. Regularly comparing performance to appropriate benchmarks helps in identifying any discrepancies and can guide adjustments to investment strategies to optimize returns over time. Other approaches, such as avoiding performance reviews or concentrating solely on short-term returns, can lead to a lack of oversight and may not provide a comprehensive view of how investments are performing relative to the broader market. Relying exclusively on fund managers can also create a disconnect if the plan sponsors do not engage with and evaluate the outcomes of those managers' investment decisions. Thus, benchmarking is integral to a structured and effective investment oversight process for plan sponsors.