Third Circuit: ERISA Demands a Prudent Process, Not Perfect Investment Performance

In In re Quest Diagnostics ERISA Litigation, — F.4th —-, No. 24-2866, 2026 WL 1783204 (3d Cir. June 22, 2026), the Third Circuit affirmed the District Court’s grant of summary judgment to Quest Diagnostics and its plan committees, holding that the fiduciaries of Quest’s 401(k) plan did not breach their duty of prudence under ERISA by continuing to offer two underperforming investment options. Plaintiffs, participants in the defined-contribution Profit Sharing Plan, brought a putative class action alleging that the Plan’s fiduciaries violated 29 U.S.C. § 1104(a) by retaining the Fidelity Freedom Funds, a suite of actively managed target-date funds that also served as the Plan’s default investment, and the Invesco Global Real Estate Fund. Plaintiffs further claimed a failure to monitor under §§ 1105(a) and 1109(a) and, alternatively, a knowing breach of trust. The court grounded its analysis in the principle that ERISA fiduciary duties derive from the common law of trusts and that the statute is concerned principally with process rather than outcomes, emphasizing that a fund’s poor performance alone does not mandate drastic or sudden action.

The court applied the two-step framework drawn from Renfro v. Unisys Corp., asking first whether the fiduciary’s process was prudent and, only if it was not, whether a hypothetical prudent investor would have made the same decision anyway. Plaintiffs’ claim failed at the first step. Drawing on In re Unisys Savings Plan Litigation and three related considerations, the court asked whether the fiduciaries reviewed their advisors’ data and sought more where needed, whether they understood the bases for the opinions on which they relied, and whether they otherwise followed a process reasonable under the circumstances. The court found that Quest satisfied all three. Quest’s Investment Committee met quarterly, received annual fiduciary training, prepared Investment Policy Statements specifying that no single factor was dispositive, and retained outside investment advisors. As to the Freedom Funds, the Committee commissioned Mercer to compare them with alternative target-date funds, met with Fidelity, weighed active versus passive strategies, and reanalyzed options in 2019; Mercer never recommended removal. As to the Invesco Fund, the Committee placed it on an internal watch list in 2017, met with Invesco’s representatives, reviewed alternatives, and retained the fund for the downside protection it offered during bear markets.

The court rejected Plaintiffs’ argument that the Freedom Funds’ short-term underperformance from 2013 through 2015 established imprudence, observing that Plaintiffs had abandoned their original comparison to passively managed funds, which the court characterized, quoting Smith v. CommonSpirit Health, as comparing apples and oranges. Short-term underperformance, the court held, does not prove long-term imprudence, and ERISA fiduciaries need not select the best available investment to satisfy the duty of prudence. The court likewise found that an isolated email from a Fidelity representative suggesting the Committee did not typically review its materials amounted to no more than a scintilla of evidence insufficient to defeat summary judgment under Anderson v. Liberty Lobby, Inc., and that Plaintiffs’ expert report failed because it rested on the same legally flawed premise that short-term underperformance compelled removal.

The court next addressed Plaintiffs’ alternative theory that the Investment Policy Statements were binding under § 1104(a)(1)(D). Declining to decide whether a policy statement can be a governing plan document subject to that provision, the court held that the statements here used permissive language, providing that the Committee “may” place an investment on a watch list or remove it, and reserved that no single factor was dispositive. Drawing on trust-law principles articulated in Firestone Tire & Rubber Co. v. Bruch, the court concluded that the Committee’s discretionary judgments were reviewable only for abuse of discretion and that the Committee did not abuse its discretion in retaining either fund. The court declined to reach Plaintiffs’ default-investment and Department of Labor guidance arguments, treating them as inadequately raised. Because there was no breach of the duty of prudence, the failure-to-monitor and knowing-breach-of-trust counts necessarily failed as well. The Third Circuit affirmed the grant of summary judgment for Quest on all three counts.