The Third Circuit Court of Appeals ruled in favor of the defendants—and blessed their process as prudent—in In re Quest Diagnostics ERISA Litigation.[1] The lawsuit claimed that the defendants, Quest Diagnostics Inc. and its retirement committee, violated their ERISA fiduciary duties by failing to remove certain allegedly underperforming investments from the company’s 401(k) plan.
But the Third Circuit disagreed, as the record reflected multiple markers of a prudent process. This included, among other things, that the committee met quarterly, hired a consultant to provide investment advice, was actively involved, and scrutinized the performance of the challenged funds. Even if there were some flaws, as the plaintiffs claimed, the Court held that these alleged “imperfection[s]” did not matter because “ERISA mandates prudence, not perfection.” So long as a fiduciary’s process was “sound” and “sensible,” the Court indicated that deference should be afforded to reasonable exercises of that fiduciary’s discretion, including the decision to retain an investment during periods of weaker performance. To hold otherwise, the Court recognized, would require fiduciaries to “cut every below-average fund” to chase returns, thereby “creat[ing] chaos.”
This defense-side victory is a major win for plan fiduciaries and underscores the importance of adhering to a good process, regardless of the ultimate results.
Background
Quest Diagnostics Inc. provides clinical lab testing and related services. The company sponsors a 401(k) plan (“Plan”) to help its employees save for retirement, and the retirement committee (“Committee”) oversees the Plan. The Committee’s oversight includes selecting and monitoring the Plan’s investment options. The Committee implemented (and updated) an investment policy statement (“IPS”) providing a discretionary framework to guide its decision-making process.
The plaintiffs claimed that the defendants breached their ERISA fiduciary duties by failing to remove two funds from the Plan: the Fidelity Freedom Funds (“Freedom Funds”) and the Invesco Global Real Estate Fund (“Invesco Fund”). Both allegedly underperformed other available alternatives. The plaintiffs also argued the IPS required that both funds be removed from the Plan.
Following discovery, the defendants moved for summary judgment. The District of New Jersey granted the defendants’ motion, finding that they followed a prudent process. On appeal, the Third Circuit agreed and affirmed the district court’s decision.
The Third Circuit’s Opinion
The Court began by discussing the two-step framework for evaluating fiduciary breach claims: (i) whether the fiduciary’s process was prudent, regardless of results; and (ii) whether the decision made was objectively reasonable, regardless of process. These claims fail if a fiduciary’s process was prudent or a hypothetical prudent fiduciary would have made the same decision. Importantly, deference should be given to a fiduciary’s decisions, which often involve difficult tradeoffs.
Turning to the merits, the Court held that the fiduciary breach claim failed at step one—the defendants’ process was prudent. In addition to the process markers noted above, the Committee received annual fiduciary training, asked its consultant on two separate occasions to compare the Freedom Funds with alternative target date funds, placed the Invesco Fund on the watch list and considered potential replacements, and met with the fund managers for the Freedom Funds and Invesco Fund to discuss their performance. To the extent there were flaws in the Committee’s process, the Court held that this did not matter; prudence does not mean perfection.
The fact that the Freedom Funds underperformed over a two-year period similarly did not change the Court’s view of the Committee’s prudent process. The Court found that any such underperformance was relatively minor and did not require immediate removal, as there are “sound reasons to hold on to [a] fund during a period of weaker returns.” To implicate an imprudent process, underperformance must instead be “severe and sustained”—ERISA does not require fiduciaries to cull funds based solely on episodic and immaterial downturns in performance.
The Court also rejected the plaintiffs’ IPS claim. Even if the IPS was a binding Plan document under ERISA (an issue the Court did not decide), it included permissive language giving the Committee broad discretion. The Court reviewed the Committee’s exercise of this discretion with deference, finding that the Committee evaluated both challenged funds based on the criteria in the IPS and reasonably chose to keep them in the Plan based on its assessment.
Because the defendants adhered to a “sound” and “sensible” fiduciary process, the Court affirmed the district court’s grant of summary judgment in their favor.
Key Takeaways
The Court’s ruling is significant for plan fiduciaries, emphasizing that process matters above all else and that prudence does not mean perfection. Just as importantly, the decision also recognizes that fiduciaries are not required to chase returns by jettisoning funds during brief and immaterial periods of underperformance. Rather, courts should defer to fiduciaries who reasonably exercise their discretion in making the difficult determination of whether to retain or remove such funds.
[1] No. 24-2866, 2026 WL 1783204 (3d Cir. June 22, 2026).
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