Certified Plan Sponsor Professional (CPSP) Practice Exam

Which of the following transactions is likely a prohibited transaction?

1. An investment committee selects a low-cost well performing fund for the plan investment menu and the investment manager agrees to match the low fees for their personal investments.

2. An investment committee exclusively chooses high-cost funds to benefit themselves.

3. A fiduciary accepts gifts from service providers in exchange for plan contracts.

4. A plan participant directs their own investments without restrictions.

The correct answer is: An investment committee selects a low-cost well performing fund for the plan investment menu and the investment manager agrees to match the low fees for their personal investments.

The most appropriate answer is the option that identifies a scenario where a fiduciary's actions could present a conflict of interest, which often leads to prohibited transactions. In this case, the situation described involves an investment committee that selects a low-cost, well-performing fund for the plan, but the investment manager offers to match those low fees for their personal investments. This arrangement raises potential red flags concerning the fiduciary duty because it introduces the possibility of self-dealing or preferential treatment. Fiduciaries are required to act in the best interests of the plan participants and beneficiaries. However, if personal gains for the investment manager influence the investment committee's selection process, it compromises impartial decision-making and creates an inherent conflict of interest, which is a hallmark of a prohibited transaction under fiduciary standards. In contrast, while the other choices may involve questionable or unethical behaviors, they don't reflect the specific dynamics of a transaction being prohibited under the regulatory framework as clearly as the selected choice. For example, while exclusively choosing high-cost funds to benefit oneself may not directly constitute a transaction with a plan's assets, it certainly violates fiduciary duty principles. Similarly, accepting gifts from service providers could also indicate a failure of fiduciary responsibilities but wouldn't necessarily constitute a transaction involving the plan