Certified Plan Sponsor Professional (CPSP) Practice Exam

Which of the following is a potential disadvantage of offering company stock in a qualified plan?

1. Increased diversification for participants

2. Potential conflict of interest due to non-public information

3. Regulated stock valuations

4. Lower administrative costs

The correct answer is: Potential conflict of interest due to non-public information

Offering company stock in a qualified plan can present significant challenges, particularly related to potential conflicts of interest arising from the ownership of non-public information. Employees who hold company stock may possess insights into the company's operations, financial status, or future prospects before this information is made public. This situation can lead to ethical dilemmas, as they may be uncertain about how to act on this knowledge when it comes to deciding whether to buy or sell their shares. For instance, if an employee knows that the company is about to announce poor earnings, their decision to sell stock holdings could conflict with their loyalty to the company. Additionally, they might struggle with balancing the interests of their financial well-being against their obligations to the company and its stakeholders. This dynamic can create tension not just for the employee, but as a broader issue for the company, as it raises questions about the fairness and equity in how information is used. In contrast, the other options focus on positive aspects or minor considerations that do not relate to the core conflict of interest issue. Increased diversification is actually seen as a benefit rather than a disadvantage, regulated stock valuations pertain more to compliance sharing and will not impact a participant’s risk due to the company's stock performance, and lower administrative costs do not directly tie into