Article
Understanding who qualifies as an investment fiduciary under the Employee Retirement Income Security Act (ERISA) is critically important. This article examines the longstanding “five-part test” for investment advice fiduciaries and clarifies its application to employees of plan sponsors who serve in retirement plan management roles.
What Is the Five-Part Test?
The U.S. Department of Labor established the five-part test in 1975 to determine who qualifies as an investment advice fiduciary under ERISA. According to this test, a person is considered an investment advice fiduciary if they:
- Render advice about securities or other property values, or make recommendations about investing in, purchasing, or selling securities or other property
- Provide this advice on a regular basis
- Do so pursuant to a mutual understanding
- With the understanding that such advice will serve as a primary basis for investment decisions
- And the advice is individualized to the specific needs of the plan
This test has been historically significant because all five parts must be satisfied for someone to be classified as a fiduciary. This allowed many financial advisors to structure their services to avoid fiduciary classification and the accompanying responsibilities.
Plan Sponsor Employees: Are They Investment Advice Fiduciaries?
Employees of the plan sponsor who serve on retirement committees or make plan decisions are generally not considered investment advice fiduciaries under the five-part test. Here’s why:
Different Fiduciary Capacities
There are multiple ways to become a fiduciary under ERISA. Most employees of plan sponsors who serve on retirement committees are functional fiduciaries under ERISA section 3(21)(A)(i) or (iii) because they exercise discretionary authority over plan management or administration—not because they render investment advice for a fee.
The “Fee” Requirement
To be an investment advice fiduciary under the five-part test, a person must render investment advice “for a fee or other compensation.” Employees who provide advice as part of their normal job duties typically don’t receive separate compensation specifically for that advice—their regular salary covers all their job functions.
Regular Basis Requirement
For employees who only occasionally make investment-related recommendations or who only participate in periodic committee meetings, the “regular basis” prong of the test may not be satisfied.
Mutual Understanding Prong
In an employer-employee relationship where the employee is acting in their capacity as a plan committee member or administrator, there typically isn’t a “mutual understanding” that their statements constitute professional investment advice that serves as a primary basis for investment decisions.
Important Exceptions and Considerations
While most plan sponsor employees aren’t investment advice fiduciaries, there are exceptions:
- If an employee has professional investment credentials, regularly provides individualized investment recommendations outside their normal administrative duties, and receives special compensation for this service, they could potentially meet the five-part test.
- Employees may still be fiduciaries under other provisions of ERISA if they exercise discretionary authority over plan management, administration, or assets.
Recent Regulatory Developments
The Department of Labor’s 2024 Fiduciary Rule attempted to replace the five-part test with a broader three-part definition that eliminated the “regular basis” and “primary basis” requirements. This would have significantly expanded who qualifies as a fiduciary. However, federal district courts issued nationwide injunctions blocking the rule’s implementation, effectively halting its enforcement.
The government initially appealed these rulings, but under the new administration, the Department of Labor has requested multiple extensions in the appeals process through October 2025 to reconsider its approach.
Conclusion
Understanding fiduciary status is crucial for plan sponsor employees who serve on retirement committees or make decisions affecting retirement plans. While most employees acting within their normal job responsibilities won’t be classified as investment advice fiduciaries under the five-part test, they may still be fiduciaries under other ERISA provisions.
As the regulatory landscape continues to evolve, plan sponsors should work closely with ERISA counsel to ensure they understand their fiduciary responsibilities and implement proper governance procedures to mitigate risk and ensure compliance.
