Certified Plan Sponsor Professional (CPSP) Practice Exam

Which plan must primarily invest in employer stock?

1. 401(k) plan

2. Employee stock ownership plan (ESOP)

3. Traditional IRA

4. Roth retirement plan

The correct answer is: Employee stock ownership plan (ESOP)

The correct answer is that an Employee Stock Ownership Plan (ESOP) must primarily invest in employer stock. An ESOP is a specific type of retirement plan that is designed to provide employees with an ownership interest in the company. This ownership is typically achieved through shares of stock, which means that the primary investment focus of the plan is on the employer's stock. The structure of an ESOP allows employees to benefit from the company's growth and performance, aligning their interests with those of the shareholders. Additionally, contributions to the ESOP can be made in the form of stock or cash, but the ultimate aim is to hold and invest primarily in the shares of the employer. In contrast, a 401(k) plan offers a broader range of investment options, which may include company stock but is not limited to it. Traditional IRAs and Roth retirement plans are individual retirement accounts that generally do not focus on any specific type of investment, such as employer stock. Therefore, the unique requirement of an ESOP to invest primarily in employer stock distinguishes it from the other options presented.