CFA Level 1 Pension Plans: Characteristics, Objectives, and Constraints

False Statement about Defined Contribution and Defined Benefit Pension Plans

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Question

Isabelle Santana and Marat Loring are studying for the Level 1 CFA examination. Loring is having difficulty determining the objectives and constraints of defined contribution and defined benefit pension plans. To help Loring study, Santana creates the following list of characteristics and asks Loring to select the one that is

FALSE. Which statement should Loring select?

Answers

A. For a defined benefit plan, the most important factors that affect long-term fund performance are the individual asset selection process and the degree of market timing allowed.

B. Both plans are tax-exempt.

C. Both plans are federally regulated under the Employee Retirement Income Security Act (ERISA).

D. The employee bears all the investment risk in a defined contribution plan.

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Explanations

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A. B. C. D.

Even though these two investment decisions (timing and individual security selection) add value to the portfolio, the real foundation of returns comes from the original asset allocation policy decisions. Empirical studies have shown that 85 percent to 95 percent of a portfolio's total return comes from the asset allocation policy decision (determining allowable asset classes and weighting these classes).

The other statements are correct.

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