What's Happening?
WilmerHale partner Lori Martin, special counsel Brad Konstandt, and counsel Charles Bridge have analyzed a significant appellate decision by the US Court of Appeals for the Third Circuit concerning ERISA prudence claims. Their analysis, featured in the November-December
2026 issue of Employee Benefit Plan Review, focuses on the court's unanimous decision to affirm summary judgment for plan sponsor Quest Diagnostics. The case involved plaintiffs arguing that Quest's fiduciaries should have removed underperforming actively managed target-date funds and a real estate fund. However, the court emphasized the importance of a prudent process in selecting investment options rather than solely focusing on investment success or short-term underperformance. The authors highlight that the court tested the fiduciaries' process and found that comparisons to passively managed funds could not sustain the claim, providing practical guidance for plan fiduciaries based on their experience in ERISA fiduciary-duty litigation.
Why It's Important?
This Third Circuit decision is crucial for plan fiduciaries across the U.S. as it reinforces the legal principle that a well-documented and prudent process in investment selection is paramount, rather than merely the investment's outcome. For companies and their fiduciaries, this ruling provides a strong defense against class-action lawsuits targeting retirement plan performance, particularly concerning target-date funds. It underscores the need for fiduciaries to actively engage with outside investment advisers, thoroughly understand the rationale behind each recommendation, and maintain meticulous records of their deliberations. This emphasis on process over prescience could reduce the vulnerability of plan sponsors to litigation, potentially lowering legal costs and increasing confidence in fiduciary decision-making. Conversely, plaintiffs seeking to challenge investment performance will face a higher bar, needing to demonstrate flaws in the fiduciary process rather than just poor returns.
What's Next?
Plan fiduciaries are encouraged to review and potentially strengthen their internal processes for selecting and monitoring retirement plan investments. This includes ensuring robust documentation of all decisions, consultations with investment advisers, and the reasoning behind investment choices. The ruling suggests that fiduciaries should anticipate that ERISA claims may not reach summary judgment or trial until years after the events in question, making comprehensive record-keeping even more critical. Legal firms specializing in ERISA litigation will likely advise clients to adopt more rigorous procedural safeguards. This decision could also influence future litigation strategies, shifting the focus of plaintiffs' attorneys towards identifying procedural deficiencies rather than solely relying on investment underperformance.
Beyond the Headlines
The ruling by the Third Circuit has broader implications for corporate governance and risk management within the financial services industry. By prioritizing process, the court is subtly encouraging a culture of diligent oversight and accountability among fiduciaries, moving away from a purely results-oriented assessment that can be influenced by market volatility. This could lead to a more standardized and transparent approach to investment management within retirement plans, potentially benefiting plan participants through more stable and thoughtfully managed portfolios. The decision also highlights the evolving legal landscape surrounding artificial intelligence and its potential impact on financial services, as WilmerHale is also involved in shaping rules for the U.S. financial services industry regarding Agentic AI, suggesting a future where technological advancements will further complicate fiduciary duties and require even more sophisticated processes.
