Revenue Sharing Questioned in New Quest Diagnostics Lawsuit

A new Employee Retirement Income Security Act (ERISA) lawsuit has been filed in the U.S. District Court for the District of New Jersey, naming Quest Diagnostics and several of its retirement plan committees as defendants.

The fiduciary breach lawsuit is yet another example of an “excessive fee” challenge to be filed in a district court claiming that the plan sponsor failed to meet ERISA’s prudence and loyalty standards. Quest Diagnostics is accused of failing to objectively and adequately review its retirement plan’s investment portfolio “to ensure that each investment option was prudent, in terms of cost.” It is also accused of maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories.

A key fact included in the allegations is that the Quest Diagnostics plan reportedly has approximately $4 billion in assets, qualifying it as a “jumbo plan” in industry parlance. The plaintiffs say this means it should be able to secure easy access to very low-cost investment options, given the economies of scale such buying power generates.

“In many instances, defendants failed to utilize the lowest cost share class for many of the mutual funds within the plan, and failed to consider certain collective trusts available during the class period as alternatives to the mutual funds in the plan, despite their lower fees and materially similar investment objectives,” the complaint states. “Defendants’ mismanagement of the plan, to the detriment of participants and beneficiaries, constitutes a breach of the fiduciary duties of prudence and loyalty, in violation of 29 U.S.C. Section 1104. Their actions were contrary to actions of a reasonable fiduciary and cost the plan and its participants millions of dollars.”

The complaint argues that it is not prudent to select higher cost versions of the same fund even if a fiduciary believes fees charged to plan participants by the “retail” class investment were the same as the fees charged by the “institutional” class investment, net of the revenue sharing paid by the funds to defray the plan’s recordkeeping costs.

“Fiduciaries should not choose otherwise imprudent investments specifically to take advantage of revenue sharing,” the complaint states.

In addition to the single count regarding ERISA’s prudence and loyalty requirements, the complaint includes a second count that alleges the company also failed to adequately monitor the fiduciaries it tasked with serving the plan.

This complaint is not the only legal action Quest Diagnostics is facing with respect to its retirement savings program. In early July, the company became the target of one of a trio of lawsuits questioning the use of actively management funds provided by Fidelity. The asset manager itself is not named as a defendant in any of the complaints.

The full text of the new complaint is available here. Quest Diagnostics has not yet responded to a request for comment.