Retirement Plans: Funding, Investments, and Plan Financing
Domain overview
This domain tests how retirement promises are financed and how plan assets are invested and monitored. It includes DB minimum funding, PBGC premiums, DC trusts, ERISA fiduciary duties, 404(c), QDIAs, and fee disclosure.
Funding
DB plans are funded through actuarial valuations using assumptions for interest, mortality, and turnover. ERISA minimum funding rules require contributions to meet the funding target; shortfalls can trigger excise taxes under IRC 4971 and benefit restrictions if the adjusted funding target attainment percentage falls below 80% and other thresholds. PBGC premiums fund the insurance program for covered single-employer and multiemployer plans. DC plans are financed by employer and employee contributions held in trust; forfeitures may reduce employer contributions.
Investments and fiduciary rules
ERISA 404(a)(1) requires prudence, loyalty, diversification, and adherence to plan documents. Section 404(c) shields fiduciaries from participant-directed investment losses only if the plan offers a broad range of investments, allows meaningful choice, and provides required disclosures. A QDIA, such as a target-date fund, provides 404(c)(5) protection if the default meets DOL rules and participants receive notice. Fee disclosures include 408(b)(2) for service providers and 404a-5 for participants.
Worked example
A plan committee replaces its stable-value fund with a short-term bond fund after one year of poor performance. Reasoning: the fiduciary must act prudently and in participants' interest; performance alone is not a sufficient basis to remove a diversified option. The committee should document its review of the investment policy, fees, and risk. If the plan uses a QDIA, the committee must monitor it and give the required annual notice.
Traps
404(c) does not protect the selection or monitoring of the investment menu. Late deposit of participant deferrals is a fiduciary breach; the DOL safe harbor for small plans is generally seven business days. Using plan assets for settlor expenses is a prohibited transaction. Do not confuse 408(b)(2) provider disclosure with 404a-5 participant disclosure.