Federal courts have long applied a highly deferential “abuse of discretion” standard of review to claims for benefits under ERISA Section 502(a)(1)(B)—in other words, a court will uphold a discretionary fiduciary’s decision to deny benefits unless the decision was arbitrary or capricious. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989).
Recently, the Courts of Appeal for the Third and Seventh Circuits held that courts must also apply the abuse of discretion standard of review to class action claims brought under ERISA Section 502(a)(2) that challenge investment decisions made by discretionary fiduciaries for 401(k) plans and employee stock ownership plans. See In re Quest Diagnostics ERISA Litig., 179 F.4th 217 (3d Cir. 2026); see also Rush v. GreatBanc Tr. Co., — F.4th —, 2026 WL 2071139 (7th Cir. 2026).
The standard of review matters. All else equal, the more deferential the standard, the more likely a court will uphold a defendant-fiduciary’s decision. The standard of review not only impacts a court’s analysis at trial, but at the pleading stage, too, where courts determine whether a complaint’s allegations put forward a plausible claim for relief. Therefore, if a plaintiff fails to allege facts in their complaint making it plausible that the defendant-fiduciary will be liable under an arbitrary and capricious standard, the complaint fails to state a claim for relief.
The Third Circuit issued its opinion first, in In re Quest. The court affirmed a district court’s grant of summary judgment over a Section 502(a)(2) claim that a 401(k) plan’s fiduciary committee violated ERISA’s duty of prudence by selecting and retaining underperforming investments in the plan. In evaluating the substance of that claim, the Third Circuit recognized that the plan’s investment policy statement gave the fiduciary “discretion” over what investments to select and retain. Given that the fiduciary had discretion, the proper standard to evaluate whether the fiduciary breached their duties was whether the fiduciary abused its discretion by failing to consider issues relevant to the challenged investment options. As the court put it, the fiduciary’s exercise of its discretion in selecting and retaining a fund “is not subject to control by the court except to prevent an abuse . . . of his discretion.”
The Seventh Circuit issued a similar holding a few weeks later in Rush. There, the Seventh Circuit applied the same deferential abuse of discretion standard while affirming a district court’s trial decision for the defendants on a Section 502(a)(2) claim that an ESOP’s trustee violated ERISA’s duty of prudence by approving the sale of a company owned by an ESOP at too low a price. The Seventh Circuit began from the principle that “an ERISA fiduciary’s decisions should receive judicial deference where there is no conflict of interest.” Like the Third Circuit, the Seventh Circuit reasoned that “principals of trust law” instruct “that a trustee’s discretionary decisions involving the administration and management of plan assets receive deferential review.” It thus concluded that when an ESOP plan document provides a trustee with “discretion in discharging its duties,” such as by providing discretion to approve a sale, district courts should apply the deferential abuse of discretion standard so long as there is no actual conflict of interest.
Both the Third Circuit and Seventh Circuit reaffirmed what the Supreme Court announced in Firestone, which is that trust law principles stretching back well over a century prevent courts from “interfer[ing]” with a trustee or fiduciary “in the exercise of a discretion vested in them by the instrument under which they act.” Both Circuits found that this meant what it said: whenever a fiduciary acts with discretion entrusted to it by an ERISA plan, courts must defer to the fiduciary’s judgment—even outside the context of a Section 502(a)(1)(B) claim for benefits. Such a deferential standard aligns with the process-centric nature of ERISA’s duty of prudence standard, which focuses on a fiduciary’s conduct rather than the results of the fiduciary’s decision.
We expect that plaintiffs in the Third and Seventh Circuits—and in other circuits that apply a deferential standard—will try to plead around the deferential standard in hopes that a court won’t apply it. For example, the Seventh Circuit’s arbitrary and capricious standard applies to fiduciaries operating without a conflict. Plaintiffs seeking to avoid the deferential standard may try to plead facts suggesting that a defendant-fiduciary was conflicted and, therefore, can’t seek protection from the arbitrary and capricious standard.
The fiduciary’s exercise of its discretion in selecting and retaining a fund “is not subject to control by the court except to prevent an abuse . . . of his discretion."
