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CPSP 2.3 Exam Questions And Answers
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CPSP 2.3 Exam Questions And AnswersSection 1: Behavioral Finance - Answer Behavioral finance is a field that seeks to find
explanations for, and solutions to, the seemingly irrational financial decisions that
people often make. For years, despite spending millions annually on employee
education designed to encourage better savings and retirement outcomes, overall
participation rates hovered between two-thirds and three-quarters of those eligible, and
deferral rates clustered around the employer match. Enter behavioral finance, and its
first widely embraced design, Save More Tomorrow (SMarT), touted by now-Nobel Prize
winner Richard Thaler of the University of Chicago and Schlomo Benartzi of the
University of California at Los Angeles (UCLA). The pair didn't create the notion of
automatic enrollment - under inauspicious names like "negative election", it had been in
place at some employers since the early 1980s - but they certainly brought the concept
to prominence, culminating in key retirement savings enhancement provisions in the
Pension Protection Act of 2006, including automatic enrollment, contribution rate
acceleration and qualified default investment alternatives.
Employee Education - Answer In the past, plan sponsors have provided employee
education for a number of different reasons. A study1 by the Plan Sponsor Council of
America (PSCA) reveals that among all plans—small to large—the main reasons, ranked
by importance, that sponsors offer retirement savings education have been to 1.
Increase plan participation; 2. Increase employee appreciation of the plan; 3. Help
employees with retirement planning; and 1 PSCA, 60th Annual Survey, 2018 3 4.
Increase pre-tax employee salary deferrals
employee education part 11 - Answer In order to accomplish these educational goals,
employers have used a variety of materials and media, primarily relying on: 1.
Individually targeted, but generalized, communications using regular and Email; 2.
In-person seminars and workshops; 3. Enrollment kits; 4. Benefits websites and mobile
platforms with savings tools; 5. Personalized retirement income projections; and 6. Fund
performance sheets
Why Education isn't Working - Answer Numerous studies have shown that financial
education does not necessarily produce improved financial behaviors and outcomes.
Moreover, financial stress is at an all-time high for workers. Why doesn't traditional
financial education work? There are, potentially, several reasons: 1. Good participant
intentions often don't translate to actions. Inertia favors inactivity. 2. The information
, quickly becomes outdated with the proliferation of new financial products. 3. A
"one-size-fits-all" approach, generally, does not work. 4. The information does not
effectively address why seemingly rational investors make irrational systematic errors
when making financial decisions. 5. The employees' cost of other benefits squeezes out
401(k) savings.
Why Education isn't Working - Answer The reality is that human beings struggle with
complex financial decisions - and the traditional approach to retirement plan education
presents them with a series of unknowns, and for many, unknowable, decisions,
including: • How much can I afford to save? • How much do I need to save? • How much
of that savings should be pre-tax? • How should I invest that savings? • Who should be
my beneficiary? • What's a mutual fund? • How do I fill out this complicated form?
Behavioral Hurdles - Answer Most individuals must overcome certain behavioral
hurdles, notably: • They are stymied by too many choices • They fear loss more than they
value gain • They separate decisions that should be combined • They make decisions
based on belief that things will return to the way they have always been • They rely on
heuristics - rules of thumb, or educated guesses to make a quick decision
Behavioral Hurdles - Answer All of which often result in no action, or certainly a
postponement of action - as inertia takes over. Sir Isaac Newton's First Law of Motion -
that a body at rest will remain at rest unless an outside force acts on it - holds true here
as well as in nature. The term academics use to describe this tendency for individuals to
make (or not make) decisions deemed "rational" and/or in their bests interests is
"bounded rationality." So, how can plan sponsors use behavioral science to help
workers make better decisions?
Choice Architecture - Answer Richard Thaler and Cass Sunstein in their 2008 book
Nudge: Improving Decisions about Health, Wealth, and Happiness coined a term
"choice architecture" to describe an approach that would 7 improve consumer
decision-making by minimizing biases and errors - essentially not limiting choice, but
"nudging" individuals toward choices that are in their best interest. This approach can
include the use of approaches including the use of defaults, structuring the options
available, and providing context and/or feedback for the decisions.
Financial Well-Being - Answer While behavioral finance and "choice architecture" can
provide useful strategies to help overcome inertia and guide workers to more optimal
solutions, these days the most innovative benefit programs are taking a broader, more
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