Certified Plan Sponsor Professional (CPSP) Practice Exam

Why might a plan fiduciary face increased risk of litigation when offering company stock?

1. Due to high administrative costs

2. Because the stock may lose significant value

3. When there are too many employees

4. Because it is not diversified

The correct answer is: Because the stock may lose significant value

The choice of "because the stock may lose significant value" accurately highlights a significant risk exposure for plan fiduciaries when offering company stock. Fiduciaries have a legal duty to act in the best interest of the plan participants, which includes a responsibility to manage plan investments prudently. When company stock is a primary investment within a retirement plan, any significant decline in the stock's value can lead to substantial financial losses for participants. This situation raises concerns regarding the fiduciary's decision-making process. If the stock depreciates, participants may claim that the fiduciary failed to foresee the risks associated with holding a concentrated position in a single asset and did not act in a manner that protects participants' investments—leading to potential litigation. Holding a large amount of company stock can also create conflicts of interest, where fiduciaries may be torn between the interests of the company and the interests of plan participants. Although administrative costs and lack of diversification are important aspects of plan management, they do not directly relate to the risk of litigation associated with the fluctuating value of the underlying investment. The presence of too many employees does not inherently increase litigation risk related to company stock offerings. Therefore, the clear connection between the significant value erosion of company stock and the fiduciary's obligations