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A New Jersey federal judge dismissed a proposed class action against Quest Diagnostics Inc., in which former employees accused the company of mismanaging its $5 billion retirement plan by retaining underperforming investment funds. U.S. District Judge Julien Xavier Neals ruled Wednesday that Quest had followed prudent processes for managing the plan’s investments, rejecting claims that the company violated the Employee Retirement Income Security Act (ERISA).

No Class Certification and Dismissal With Prejudice

Judge Neals denied the workers’ bid for class certification and dismissed the lawsuit with prejudice, meaning the plaintiffs cannot refile the same claims. The suit had alleged that Quest's investment committee failed to adequately monitor and remove poorly performing funds, but the court found the company’s actions to be diligent and reasonable.

The judge stated, "Plaintiffs have failed to raise a triable issue of fact as to whether defendants engaged in a prudent process in reaching their investment decisions," concluding that the plaintiffs’ breach of fiduciary claim failed.

Prudent Process for Managing Investments

The ruling emphasized that Quest Diagnostics had taken appropriate steps in managing the retirement plan's funds. Quest regularly consulted with an investment adviser, who reviewed the plan's lineup quarterly and made recommendations on fund performance. The company’s investment committee also placed underperforming funds, such as the Fidelity Freedom Funds and Invesco Fund, on a watch list when necessary, with some funds eventually removed from the plan based on the adviser’s recommendations.

Quest Diagnostics Escapes 401(k) Mismanagement Suit : Arguments Rejected by the Court

The plaintiffs argued that the investment committee did not independently scrutinize the funds or actively engage in decision-making. However, the judge disagreed, pointing to evidence that the committee proactively sought investment advice and took appropriate action when issues with the funds arose. For example, the Freedom Funds were put on a watch list in 2020, and the Invesco Fund was removed from the plan the same year after the committee's adviser recommended its exclusion.

Judge Neals also rejected the claim that the committee’s meeting minutes failed to reflect discussions about the funds' underperformance. Citing a similar case, Falberg v. Goldman Sachs Group Inc., the judge noted that meeting minutes are not required to be a complete transcript of every discussion.

Fund Performance Considered Holistically

The former employees contended that Quest should have removed the Freedom Funds by 2015 and the Invesco Fund by 2016 due to subpar performance. The court, however, ruled that investment performance is just one of several factors that fiduciaries must consider. Judge Neals noted that the Freedom Funds sometimes outperformed their peers, and the Invesco Fund met certain benchmarks. Additionally, the court found sufficient evidence that Quest had thoroughly reviewed both funds and took action when warranted.

Quest Diagnostics Escapes 401(k) Mismanagement Suit : Legal Representation

The former workers were represented by attorneys from Miller Shah LLP, while Quest Diagnostics was represented by Morgan Lewis & Bockius LLP. Both parties have yet to respond to requests for comment.