August 11, 2026
By: Shannon L. Kelly and Carolina Blanco
A new 3rd Circuit decision is both a timely reminder and a preview of where federal regulators are headed. In In re Quest Diagnostics ERISA Litigation, the court confirmed that ERISA fiduciaries who follow a prudent, ongoing process will not be second-guessed simply because an investment underperforms relative to its peers. The decision arrives just weeks after the U.S. Department of Labor (DOL) proposed new regulations that would formalize a process-based protection that would, for the first time, give fiduciaries a detailed roadmap and safe harbor for evaluating plan investments. Read together, the two developments offer plan fiduciaries a blueprint for building a defensible fiduciary process going forward.
The Court Focused on Process, Not Outcomes
In Quest Diagnostics, plan participants sued the company in its role as fiduciary of the company’s 401(k) plan, claiming it breached its fiduciary duty of prudence by keeping two underperforming investments on the plan's roster of investment options. The plaintiffs argued that both investments lagged comparable benchmarks over multiple years and that a prudent fiduciary would have removed or replaced them sooner. The district court granted summary judgment to Quest, and the 3rd Circuit affirmed, holding that ERISA "is mostly concerned with process, not outcomes," and that fiduciaries are not required to have a crystal ball. Poor fund performance alone, the court explained, does not require a fiduciary to take drastic or sudden action; the relevant question is whether the fiduciary investigated the underperformance and made an informed, reasoned decision about what to do next.
To determine whether the fiduciaries were prudent, the court looked to three considerations in evaluating the Investment Committee's conduct: (1) whether the fiduciaries reviewed their advisors' data and sought more when needed; (2) whether they analyzed and understood the basis for the opinions they relied on; and (3) whether their overall process was otherwise reasonable under the circumstances. On the facts, the committee checked every box. It met quarterly to review the plan's investment menu, and its members received annual training on their fiduciary duties. It engaged an outside investment advisor, Mercer, but did not simply rubber-stamp Mercer's recommendations. It met directly with the fund manager to discuss the funds' strategy and performance, weighed the relative merits of active versus passive management, and evaluated funds with different glide paths before deciding to retain the existing lineup. In 2019, when performance concerns persisted, the committee proactively asked Mercer to reanalyze the target-date fund options rather than waiting for the next scheduled review.
The court found this kind of follow-up significant, concluding that Quest was "fully aware of how and why" its advisor recommended keeping the investment options because the committee had done its own homework rather than accepting the recommendation at face value. Similarly, with respect to the second investment fund, the committee understood and could explain that the fund was more conservative than some competitors, which gave the plan valuable "downside protection" in down markets even though it caused the fund to lag during bull markets. The committee’s understanding of the trade-off, rather than the fund's raw performance, is what mattered to the court.
DOL's Proposed Fiduciary Regulations
In many ways, the Quest Diagnostics decision mirrors the DOL’s recent proposed regulations. These proposed regulations clarify and create a safe harbor for the duty of prudence in selecting plan investment options. Issued in response to Executive Order 14330, “Democratizing Access to Alternative Assets for 401(k) Investors,” the proposal is meant to give fiduciaries a clearer framework for evaluating both traditional funds and alternative investments such as private equity and credit, real estate, actively managed digital asset vehicles, commodities, infrastructure, and lifetime income strategies. The DOL describes the goal as clearing regulatory burdens and lowering litigation risk for prudent fiduciaries while encouraging asset diversification.
Like the 3rd Circuit in Quest Diagnostics, the proposed rule is built on the premise that the duty of prudence is "largely a process-based inquiry," assessed based on what a fiduciary knew and did at the time of the investment decision, not on hindsight based on how the investment ultimately performed. The DOL describes three principles underlying the proposal: (1) that ERISA is fundamentally a law grounded in process; (2) that ERISA affords fiduciaries maximum discretion and flexibility in selecting investment options, including alternative investments; and (3) that when a fiduciary follows a prudent process, it should be judged under the presumption of prudence.
The Proposed Six-Factor Safe Harbor
The heart of the proposal is a non-exhaustive, six-factor safe harbor. A fiduciary that objectively, thoroughly, and analytically considers each factor would have its judgment presumed to satisfy the duty of prudence and be entitled to significant deference. The six factors are:
- Performance: risk-adjusted expected returns, net of fees, over an appropriate time horizon, compared to a reasonable number of similar alternatives.
- Fees: whether costs are appropriate in light of expected returns and other values provided, but does not require the selection of the lowest-fee option.
- Liquidity: whether the investment offers sufficient liquidity for anticipated plan and participant needs, recognizing that some illiquidity may be an acceptable trade-off for enhanced returns.
- Valuation: whether adequate measures exist to ensure the investment can be timely and accurately valued.
- Performance benchmark: identification of a meaningful benchmark against which risk-adjusted returns can be measured, with flexibility for new or innovative investment designs.
- Complexity: whether the fiduciary has the skill and capacity to understand the investment or needs assistance from a qualified advisor.
Notably, the proposed safe harbor addresses only the duty of prudence under ERISA Section 404(a)(1)(B). It would not excuse a fiduciary from its separate and independent duty of loyalty under Section 404(a)(1)(A), or from compliance with the prohibited transaction rules under Section 406. Fiduciaries who satisfy this safe harbor must separately ensure they are acting solely in participants' interests and avoiding disqualifying conflicts.
The Takeaway
Taken together, the decision and the proposed regulations send a consistent message: an ERISA fiduciary's best defense for a breach claim is not perfect investment performance, but a process that objectively, thoroughly, and analytically considers the factors relevant to each investment decision.
Questions?
Contact GrayRobinson Shareholder Shannon Kelly or a member of the Labor and Employment Section.