Certified Plan Sponsor Professional (CPSP) Practice Exam

What constitutes an example of a prohibited transaction in a retirement plan?

1. Investing in a diversified equity fund

2. Selecting a well-performing fund with low costs

3. Matching low fees for personal investments

4. Hiring an independent investment manager

The correct answer is: Matching low fees for personal investments

A prohibited transaction in the context of retirement plans typically involves certain types of transactions that can lead to conflicts of interest or self-dealing, particularly those that benefit a plan sponsor or fiduciary rather than the plan participants. Matching low fees for personal investments is a clear example of a prohibited transaction because it indicates a potential conflict of interest. When the plan sponsor prioritizes personal investments over those of plan participants, it undermines the fiduciary responsibility to act in the best interest of the plan participants. This behavior can also lead to a situation where the plan sponsor is directing investment choices that favor their own financial interests instead of those that would be most beneficial for the participants in the retirement plan. In contrast, investing in a diversified equity fund, selecting a well-performing fund with low costs, and hiring an independent investment manager are all activities that align with the fiduciary duty to act in the best interest of plan participants. These actions are focused on optimizing the investment strategy within the plan without personal conflicts of interest, which is why they are considered appropriate and permissible within the framework of retirement plan management.