Accredited Wealth Management Advisor Practice Exam

Under the Employee Retirement Income Security Act of 1974, what characterizes a prohibited transaction?

1. Not allowed under any circumstances

2. Must be reversed and the plan participant made whole again

3. Has a substantial conflict of interest and must be avoided or exempted

4. Not allowed and results in a fine or administrative action

The correct answer is: Has a substantial conflict of interest and must be avoided or exempted

A prohibited transaction under the Employee Retirement Income Security Act (ERISA) is characterized by having a substantial conflict of interest, necessitating that such transactions be avoided or exempted. This means that if a transaction poses a significant risk of self-dealing or conflicts between the interests of plan participants and the interests of those managing the plan, it is deemed prohibited. The essence of this characterization focuses on the protection of retirement plan participants from any actions that could jeopardize their benefits or create an unfair advantage for those overseeing the plans. For instance, transactions involving plan assets where the fiduciary has a personal interest or where there is a close relationship to a party involved can lead to a significant conflict that ERISA aims to prevent. While other options touch on the consequences of prohibited transactions, they do not emphasize the underlying conflict of interest that defines the nature of such transactions, which is why recognizing this characteristic is crucial for compliance with ERISA.