A Circuit Court’s Reliance on Deference to Discretionary Fiduciary Decisions, as Firestone Requires

The Third Circuit’s decision in Johnson v. Quest Diagnostics, Inc. was a recent bright spot for ERISA litigation in a sea of mostly depressing news.¹

The plaintiffs in the Quest case brought suit alleging that the retention of two underperforming actively managed funds in Quest’s 401(k) plan was a fiduciary breach. Alleging that the selection or retention of underperforming investments constitutes a fiduciary breach, unfairly raised with the benefit of hindsight, has been a prevalent tactic used by plaintiffs’ firms who have filed more than 60 such lawsuits against ERISA plans in the first half of 2026. In Quest, however, the district court ruled for the defendants on summary judgment, and the Third Circuit affirmed.

The Third Circuit’s decision was based on the very clear point that has eluded so many other courts: ERISA is a law of process, not a law of results. The fact that a fund underperformed another fund is not the key point; the critical inquiry is whether the plan fiduciary engaged in a prudent process in deciding to select or retain an allegedly underperforming fund. The Quest court summarized this point as follows:

ERISA is mostly concerned with process, not outcomes. And the Quest fiduciaries followed a sound process, collaborating with an outside investment advisor and meeting with the managers of the challenged Funds. Nor do fiduciaries need crystal balls. A fund’s poor performance alone does not mandate drastic or sudden action.

The court went on to make two more great points, one of which is almost never made and one of which is not made nearly enough.

The point that is almost never made is that, under binding Supreme Court authority, all discretionary decisions by a fiduciary are entitled to deference under an abuse of discretion standard. Plaintiffs are routinely permitted to get past the motion to dismiss without alleging any abuse of discretion, despite this clear rule of law. That needs to stop. In order to survive a motion to dismiss, district courts should require allegations of facts that show an abuse of discretion, rather than the plaintiffs’ “Monday morning quarterbacking” approach which has been successful far too frequently.

The point that is not made nearly enough is that underperformance alone cannot support a claim of a fiduciary breach. This makes complete sense since chasing hot funds can often be considered imprudent in leading plans to buy high and sell low. And data and literature, along with many courts, completely reject the idea that past performance is an indicator of future performance. It is time for ERISA fiduciaries to stop having to douse “alleged underperformance fires” one at a time across the country. It is time for all courts to recognize that the entire basis of underperformance claims is fatally flawed.

Key Point #1: All discretionary decisions by a fiduciary are entitled to deference under an abuse of discretion standard.²

The Supreme Court Requires Deference. In Firestone v. Bruch,³ the Supreme Court held that any review of an ERISA’s fiduciary duties should be guided by analogous principles found in the law of trusts. Under trust law, if a fiduciary has discretion, its decisions are entitled to deference and can only be challenged as an abuse of discretion under an arbitrary and capricious standard of review. The Supreme Court stated:

ERISA abounds with the language and terminology of trust law. . . . ERISA’s legislative history confirms that the Act’s fiduciary responsibility provisions . . . “codif[y] and mak[e] applicable to [ERISA] fiduciaries certain principles developed in the evolution of the law of trusts.” . . .

Trust principles make a deferential standard of review appropriate when a trustee exercises discretionary powers. See Restatement (Second) of Trusts § 187 (1959) (“[w]here discretion is conferred upon the trustee with respect to the exercise of a power, its exercise is not subject to control by the court except to prevent an abuse by the trustee of his discretion”).

Although Firestone addressed the standard of review in the context of a benefit claim, the Court’s holding was not so limited. As multiple courts have recognized, Firestone broadly instructs lower courts to apply trust law principles when reviewing any exercise of fiduciary discretion.⁴

For example, although many courts have overlooked this critical point over the past decade, the Third, Seventh, and Eighth Circuits have all found Firestone deference to be applicable to all discretionary fiduciary decisions. See Moench v. Robertson, 62 F.3d 553, 565 (3d Cir. 1995) (“after Firestone, trust law should guide the standard of review over claims, such as those here, not only under section [502](a)(1)(B) but also over claims filed pursuant to [section 502](a)(2) based on violations of the fiduciary duties set forth in section [404](a));” Armstrong v. LaSalle Bank Nat. Ass’n, 446 F.3d 728, 733 (7th Cir. 2006) (the “standard of judicial review of discretionary judgments is abuse of discretion”); Tussey v. ABB, 746 F.3d 327, 335 (8th Cir. 2014) (there is “no compelling reason to limit Firestone deference to benefit claims. Where discretion is conferred upon the trustee with respect to the exercise of a power, its exercise is not subject to control by the court except to prevent an abuse by the trustee of his discretion”).⁵

Johnson v. Quest Reaffirms Deference. And that brings us to June 2026 and Quest, where the Third Circuit strongly reaffirmed its view that discretionary fiduciary decisions are entitled to deference under an abuse of discretion standard:

Though we have no law directly on point, background principles of trust law favor deferring to trustees’ judgment calls. “Trust principles make a deferential standard of review appropriate when a[n ERISA] trustee exercises discretionary powers.” [quoting Firestone]. True, Firestone addressed a plan’s benefit-eligibility determinations and ultimately found the policy documents there did not grant discretion. But the rationale just quoted fits well here. . . . “[W]here discretion is conferred upon the trustee with respect to the exercise of a power,” as here, “its exercise is not subject to control by the court except to prevent an abuse by the trustee of his discretion.” [quoting Firestone].⁶

Courts reviewing fiduciary cases rarely if ever refer to Firestone deference, which can have a major effect at the motion to dismiss stage by forcing plaintiffs to allege facts showing an abuse of discretion. Quest is the most recent reminder of this critically important part of ERISA law.

Firestone Is Still the Law. Some in the plaintiffs’ lawyers camp have made a baseless argument that Firestone deference was overruled by a subsequent decision from the Supreme Court: Fifth Third Bancorp v. Dudenhoeffer. Simply untrue. The issue in that case was the standard of review of a fiduciary’s decision to invest in employer stock in an employee stock ownership plan (ESOP). The Supreme Court noted that different Circuits had adopted different, very powerful, and unique presumptions of prudence for such ESOP investments.

Here, however, is the Supreme Court’s actual holding:

In our view, the law does not create a special presumption favoring ESOP fiduciaries. Rather, the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries, except that an ESOP fiduciary is under no duty to diversify the ESOP’s holdings.

The Court obviously did not address Firestone deference; it just rejected a unique and powerful presumption for ESOP fiduciaries that in some cases had been interpreted to require the plaintiff to establish that the employer was “in a ‘dire situation’ that was objectively unforeseeable by the settlor.” In fact, Dudenhoeffer reinforced the Firestone standard by stating that when courts consider a fiduciary breach claim, courts should consider whether a complaint plausibly alleges that “a prudent fiduciary in the defendant’s position could not have concluded that” the decision was appropriate.

As further support, the Supreme Court even reiterated the deference standard after Dudenhoeffer. In Hughes v. Northwestern University, the Court stated that “courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” This language requires that courts give “due regard” – i.e., deference – to “reasonable” judgments made by the fiduciary. Requiring deference to reasonableness is the same as only disturbing “unreasonable” decisions, which is what is precluded by an arbitrary and capricious standard.

Key Point #2. Purely from a Financial Prudence Perspective, There is No Support for Strong Reliance on Past Performance as a Guide to Fiduciary Decisions.

As the Quest decision appropriately recognized, the law does not and should not require fiduciaries to rely materially on past performance for many reasons, including the key point that that would result in fiduciaries chasing the “hot” funds, i.e., buying high and selling low, which is imprudent.⁷

Past performance is an unreliable predictor of future results. In fact, recent underperformance is exactly why a fund might be prudently selected – it may be undervalued due to market overreaction. There is substantial hard data supporting this position. For example, a 2017 study of 3,331 mutual funds from 1990 to 2016 found that past performance can steer investors in exactly the wrong direction by leading them to buy high and sell low:

Institutional investors often sell funds (or fire managers) once they have underperformed the market over the last two to three years, typically replacing them with funds or managers that recently outperformed. This seemingly sensible strategy, intended to identify skilled managers, is often bad for future returns. . . [T]he newly expensive holdings typically set the stage for poor future performance. . . . Underperforming strategies are often newly cheap and might well be better candidates for new assets, not for termination. For example, the usual practice of firing recent losers and hiring recent winners achieves the exact opposite of what is intended.⁸

Similarly, a study by S&P Dow Jones Indices reviewed the performance of funds over two non-overlapping five-year periods.⁹ Among all domestic funds, only 32% of the top quartile funds for the first five-year period remained there in the second five-year period, while 20% moved to the bottom quartile and 8% merged or liquidated.

Widely accepted investment theory confirms that past performance is an unreliable predictor of future results. For example:

• In 2020, a professor at Yale School of Management conducted a study that concluded that from 1994 to 2018, “a fund’s performance is completely unpredictive of its returns in the future.”¹⁰
• In 2012, two professors from The Wake Forest University School of Law stated that “studies of actively managed equity funds have found little evidence that strong past returns predict strong future returns.”¹¹
• A 2003 article published by a University of Virginia professor stated that, “within the finance literature there is weak and controversial evidence that past performance has much, if any, predictive ability for future returns.”¹²

Further evidence of the unreliability of past performance is the contrarian theory of investing – buy what is currently out of favor.¹³ Morningstar published a striking study showing that over a 30-year period from 1994 to 2023, funds with the most outflows (depressing prices) significantly outperformed funds with the most inflows (increasing prices) and the Global Large-Stock Blend Average.¹⁴ The annual returns over the period were 10.96%, 5.57%, and 7.44%, respectively.¹⁵

Key Point #3. Quest and Abundant Other Case Law Support the Conclusion That Past Underperformance Alone Cannot Sustain a Fiduciary Claim.

Though it is not universal, many courts that have considered underperformance claims have correctly rejected arguments from plaintiffs that past underperformance alone can sustain a claim that a fiduciary breached its duties under ERISA. ERISA should be interpreted to require the plaintiff to plead some additional indication that the fiduciary acted imprudently in selecting and retaining an allegedly underperforming investment.

The recent Quest decision got this right and said it eloquently:

One cannot just “point[] to another investment that has performed better in a five-year snapshot of the lifespan of a fund that is supposed to grow for fifty years” to show that fund was an unreasonable investment. . . . [T]here may be sound reasons to hold on to the fund during a period of weaker returns. . . . Requiring fiduciaries to cut every below-average fund would create chaos.¹⁶

And although many courts have missed the mark on this point, the Quest court is not alone in reaching this conclusion, as many other circuit and district courts have similarly held that past underperformance alone is not enough to sustain a claim of fiduciary imprudence.

A sampling of these rulings is offered here:

Smith v. CommonSpirit Health, 37 F.4th 1160, 1166 (6th Cir. 2022): “Merely pointing to another investment that has performed better in a five-year snapshot of the lifespan of a fund that is supposed to grow for fifty years does not suffice to plausibly plead an imprudent decision—largely a process-based inquiry—that breaches a fiduciary duty. Precipitously selling a well-constructed portfolio in response to disappointing short-term losses, as it happens, is one of the surest ways to frustrate the long-term growth of a retirement plan. . . . Any other rule would mean that every actively managed fund with below-average results over the most recent five-year period would create a plausible ERISA violation. Unless and until it becomes feasible to have all actively managed funds perform above average, that would lead to the disappearance of this option in ERISA plans (emphasis added).”

• Pizarro v. Home Depot, 111 F.4th 1165, 1179 (11th Cir. 2024): “A few here-and-there years of below-median returns . . . are not a meaningful way to evaluate a plan’s success as a long-term investment vehicle.”
• White v. Chevron, 752 Fed. Appx. 453, 455 (9th Cir. 2018): “[T]he facts alleged . . . were insufficient to support a plausible inference of [fiduciary breaches]. Rather, as to each count, the allegations showed only that [the defendant plan sponsor] could have chosen different vehicles for investment that performed better during the relevant period.”
• Collins v. Northeast Grocery, Inc., 149 F.4th 163 (2d. Cir. 2025): Relying on the Sixth Circuit’s key language above, the Second Circuit concluded that it could not infer from six years of performance data that the defendants’ decision to select or retain the challenged fund was imprudent.
• Jenkins v. Yager, 444 F.3d 916, 925-26 (7th Cir. 2006): Noting that, while it was true that the challenged funds in an underperformance case lost money in the three prior years, the Seventh Circuit ruled that, “[n]othing in the record suggests that it was not reasonable and prudent to select conservative funds with long-term growth potential and to stay with those mutual funds even during years of lower performance.”
• Patterson v. Morgan Stanley, No. 16-cv-6568 (RJS), 2019 WL 4934834, at *11 (S.D.N.Y 2019): “[T]he duty of prudence does not compel ERISA fiduciaries to reflexively jettison investment options in favor of the prior year’s top performers. If that were the case, Plan sponsors would be duty-bound to merely follow the industry rankings for the past year’s results, even though past performance is no guarantee of future success.”
• Beldock v. Microsoft Corp., No. C22-1082JLR, 2023 WL 3058016, at *3 (W.D. Wash. 2023): “Plaintiffs’ allegations, which again are based solely on the [target date funds’] alleged poor performance during a brief timeframe, are insufficient, without more, to raise Plaintiffs’ claim above the level of speculation and into plausibility.”

If past underperformance alone could sustain a claim of fiduciary imprudence, the tidal wave of underperformance cases would grow, because virtually every plan in the country will, at some time, have funds that have not been in the top 50% (or top 10% or top 1%). If past underperformance is a key factor, the only way to avoid the onslaught of suits would be for every plan to constantly change to the hot funds, virtually guaranteeing a buy high/sell low disaster and inviting different new suits based on such imprudence. This cannot be what ERISA intended.

Conclusion.

The Third Circuit’s ruling in Quest correctly follows the Supreme Court’s ruling in Firestone v. Bruch that a fiduciary’s decisions are entitled to deference and can only be challenged as an abuse of discretion under an arbitrary and capricious standard of review.

The Third Circuit’s ruling comes at an important time. Within its recent proposed rule on selecting designated investment alternatives, the Department of Labor identified a non-exhaustive list of six factors – Performance, Fees, Liquidity, Valuation, Performance Benchmarks, and Complexity. DOL followed Firestone in the preamble to such proposal when it stated: “Trust principles make a deferential standard of review appropriate when a trustee exercises discretionary powers. See Restatement (Second) of Trusts § 187 (1959) (‘[w]here discretion is conferred upon the trustee with respect to the exercise of a power, its exercise is not subject to control by the court except to prevent an abuse by the trustee of his discretion’).”

DOL, however, subsequently stated “When a plan fiduciary objectively, thoroughly, and analytically makes a determination following the described process with respect to any of the six factors outlined in the paragraphs, its judgment regarding the factor or factors is presumed to be reasonable and is entitled to significant deference. In the Department’s view, a plan fiduciary that objectively, thoroughly, and analytically considers and makes a determination regarding any or all of the six factors should be able to confidently rely on that determination without undue fear of litigation, much like how plan fiduciaries can rely on the judicial deference the Supreme Court has acknowledged they can receive in the circumstances addressed in Firestone Tire & Rubber Co. v. Bruch.”¹⁷ This well-intentioned subsequent language can potentially be interpreted to cut back on Firestone deference to fiduciaries. Under Firestone, deference to fiduciaries’ discretionary decisions is not conditioned on a fiduciary’s use of a prudent process; on the contrary, the plaintiffs must show an abuse of discretion in order to survive a motion to dismiss. Under this quoted language, DOL can be read to infer that defendants must show, after the motion to dismiss is decided, that they used a prudent process in order to obtain deference. This unintended interpretation has been raised in comments submitted to DOL, including by the American Benefits Council (working with Davis & Harman), and will hopefully be clarified in the final rule.

Through this proposed rule, DOL intends to provide a safe harbor for fiduciaries from plaintiff firm-driven litigation that has cost ERISA plan sponsors, and their fiduciary liability insurance carriers, more than $1.5 billion dollars since the beginning of 2020. However, in 2024 the Supreme Court’s decision in Loper Bright overruled ‘Chevron deference’ so that federal courts are no longer required to defer to a government regulatory agency’s interpretation of an ambiguous statute. With seemingly less ability to influence courts, DOL has powerfully pointed out –in the preamble of its proposed rule that the existing judicial protection provided from Firestone v. Bruch should be sufficient to require courts to defer to a fiduciary’s discretionary decisions absent a showing of an abuse of discretion.

Requiring an actual abuse of discretion in fulfilling a fiduciary’s duties– not just a hindsight comparison of investment performance without any insight into a fiduciary’s process – would set a pleading standard that weeds out frivolous litigation lacking merit. For an example of what the DOL considers to meet this criteria, one need only examine the recent lawsuit filed by the DOL at the end of June – Sonderling v. Hand¹⁸ – which contains a more detailed analysis exposing an allegedly flawed fiduciary process than almost any plaintiff firm has filed in the hundreds of recent imprudent investment lawsuits.

Time will tell whether the Third Circuit’s ruling in Quest will be influential for other similar cases, whether other courts will follow the Supreme Court’s guidance in Firestone v. Bruch, or whether the DOL’s proposed rule will successfully provide a safe harbor. In the meantime, plan fiduciaries can take away that at least one Circuit court deferred to a prudent, “sound,” and well-documented fiduciary process with a “sensible strategy,” and should confirm their own fiduciary process is similarly prudent, well-documented, sound and sensible. And even more importantly, the same court affirmed that all discretionary fiduciary decisions are entitled to deference under an abuse of discretion standard.