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On June 22, 2026, the Third Circuit Court of Appeals affirmed the lower court’s summary judgment ruling in favor of defendant sponsor fiduciaries in In Re: Quest Diagnostics Erisa Litigation, an ERISA fiduciary fund “underperformance” case. Because this was a decision on summary judgment, coming after discovery, we get a consideration (and ultimate approval) by the court of the process by which plan fiduciaries selected and retained certain (allegedly) underperforming funds – providing a useful example of what constitutes fiduciary prudence in constructing and managing a 401(k) plan fund menu.
In this article we provide a brief note on certain key elements of the court’s decision.
The case is a class action in which plaintiffs claimed that Quest/Quest fiduciaries breached their fiduciary duty of prudence by keeping the Fidelity Freedom Funds (a suite of target date funds and the plan’s default option) and an Invesco real estate fund in Quest’s 401(k) plan fund menu. Plaintiffs alleged that the Fidelity TDF (which is actively managed) “performed worse than passively managed alternatives, and that the Invesco Fund also underperformed comparable funds.”
The court held that, in the first instance, defendants’ liability under ERISA’s prudence standard depended on the process it used and that their process met that standard.
Process not outcomes. The court noted that “ERISA is mostly concerned with process, not outcomes.” The court found that the Fidelity TDF’s performance “was hardly egregious”:
As of mid-2014, six of the thirteen [Fidelity] Freedom Funds matched or outperformed their benchmarks over three years. By the end of 2014, the Funds ranked at the median among target-date funds. And from mid-2014 through late 2015, almost all of them out-performed or matched their indices across at least one timespan. So it was not obvious that they were bad investments. Minor underperformance, like that in 2013 and 2014, does not demand immediate change, especially when the goal is long-term growth. Plaintiffs are right that there were probably “other investment options in the same asset class as the Freedom Funds that had better prospects.” … [P]ointing to other, stronger options is not enough— ERISA fiduciaries need not pick the best investment to satisfy their duty of prudence. [Citing the Sixth Circuit’s decision in Common Spirit] Requiring fiduciaries to cut every below-average fund would create chaos.
· Quest reviewed its advisor’s data and sought more where needed.
· Quest understood Mercer’s [Quest’s investment advisor’s] methodology and the bases underlying its opinions.
· Quest otherwise followed generally accepted practices of plan management. In this regard: “In addition to hiring and meeting regularly with an investment advisor, the Committee repeatedly revised the Plan’s menu. In 2014, it replaced one fund with a less expensive one and put another on a watch list. In 2016, it changed money-market funds. In 2017, as discussed, it put the Invesco Fund on a watch list. And in 2018, it replaced several mutual funds and put one on the watch list. Each of these actions shows that the Committee was following accepted practices in managing the Plan.”
· On this basis, the court held that “Quest’s process was sound. The Committee wisely hired an outside advisor but remained actively involved, meeting with fund sponsors and having Mercer review specific investments, including the challenged Funds. The Committee did its duty, following a prudent process.”
Plaintiffs also argued that language in the plan’s investment policy statement (IPS) was “binding” on plan fiduciaries and required that they remove the allegedly underperforming funds. The court found that the language in the IPS was in fact “permissive” and that the committee’s decision not to follow it with respect to the challenged funds was not an “abuse of its discretion.”
Probably the most distinctive element of this case is that it was decided on summary judgment (and not on a motion to dismiss). As a result, the court’s decision depended on analysis of critical facts about what defendants’ process actually was that were produced in post-motion-to-dismiss discovery.
We’ve quoted extensively from the court in order to give sponsor fiduciaries an idea of what judges may view as an adequate, prudent process for evaluating fiduciary fund menu decisions.
We will continue to follow this issue.
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This is a publication of O3 Plan Advisory Services. If you have any comments, or have questions about regulatory developments, please contact your relationship manager or Mike Barry at mbarry@octoberthree.com. The information, analyses and opinions set out herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Nothing herein constitutes or should be construed as a legal opinion or advice. You should consult your own attorney, accountant, financial or tax advisor or other planner or consultant with regard to your own situation or that of any entity which you represent or advise. Information set out or referred to above has been obtained from sources believed to be reliable. However, neither O3 Plan Advisory Services nor any of its affiliates has verified the accuracy or completeness of any such information. All information is provided “as is” and O3 Plan Advisory Services and its affiliates expressly disclaim all express and implied warranties regarding the information. Neither O3 Plan Advisory Services nor any of its affiliates shall have any liability for any use of the information set out or referred to herein.