Certified Plan Sponsor Professional (CPSP) Practice Exam

A prohibited transaction occurs when there is a conflict of interest or when a fiduciary engages in a transaction that could benefit themselves at the expense of the plan participants. In the context of the answer, when an investment committee selects a low-cost, well-performing fund and the investment manager agrees to match those low fees for their personal investments, it creates a conflict of interest. The investment manager's decision could be influenced by their personal financial benefit, which might not align with the best interests of the plan participants. This type of arrangement blurs the lines of fiduciary responsibility and violates the fiduciary duty to act solely in the interest of plan participants.

In contrast, selecting a high-cost fund for the investment menu does not necessarily constitute a prohibited transaction, as long as the decision was made in good faith and in consideration of participant needs. Offering to reduce fees for personal investments can be viewed as a negotiation rather than a direct conflict of interest, provided it does not influence the decision for the plan itself. Lastly, an independent review of all fund options is a best practice and aligns with the fiduciary responsibility to monitor plan investments effectively. Such practices help ensure that the plan operates transparently and equitably for all participants.