Certified Plan Sponsor Professional (CPSP) Practice Exam

Under what condition can a plan fiduciary engage in a prohibited transaction?

1. If it benefits the participants.

2. If it is contractually necessary.

3. If it is exempted by the Department of Labor (DOL).

4. If it has been approved by the plan sponsor.

The correct answer is: If it is exempted by the Department of Labor (DOL).

A plan fiduciary can engage in a prohibited transaction if it is exempted by the Department of Labor (DOL). The DOL establishes specific exemptions for transactions that would otherwise violate the rules established under the Employee Retirement Income Security Act (ERISA). These exemptions are designed to allow certain transactions that may be deemed necessary for the operation or management of the plan, while still adhering to the legal framework aimed at protecting the interests of plan participants and beneficiaries. Such exemptions typically come with conditions that must be met to ensure that the transaction does not negatively impact the plan participants’ interests. For example, the exemptions might require that the transaction is conducted under terms that are comparable to those available in an arm's-length transaction or consist of certain types of investments that are permissible for fiduciaries to engage in. Other conditions that might allow for prohibited transactions, as suggested in the question, do not provide sufficient legal basis on their own. For instance, a transaction benefiting the participants may still be prohibited if it violates ERISA provisions, regardless of the good intention behind it. Similarly, a fiduciary cannot engage in prohibited transactions simply because it is contractually necessary or has been approved by the plan sponsor; the governing laws and regulations take precedence.