Blurry text on external display

The Dell U2722DE is a 27" monitor with a resolution of 2560x1440 pixels. It only has the same number of pixels as the original 27" iMacs – 1/4th as many pixels as your 27" Retina 5K iMac. So it won't be as sharp – even though the color accuracy features (IPS panel, 100% sRGB, 95% DCI-P3) are decent, and even though it has a USB-C hub.

https://www.dell.com/en-us/shop/dell-ultrasharp-27-usb-c-hub-monitor-u2722de/apd/210-ayzg/monitors-monitor-accessories#techspecs_section

On top of the inherent resolution difference, my understanding is that in recent versions of macOS, Apple has removed support for sub-pixel anti-aliasing, which was used to make text better on "low-PPI" displays.

A monitor with similar features and color accuracy – and a higher 4K resolution – is the Dell UltraSharp U2723QE. If you ran it in Retina "UI looks like 2560x1440 pixels" mode (one notch down from Larger Text), I think you'd find that text looks better than on the 2.5K U2722DE.

https://www.dell.com/en-us/shop/dell-ultrasharp-27-4k-usb-c-hub-monitor-u2723qe/apd/210-bdpf/monitors-monitor-accessories

Also check settings in "on-screen display" settings. Sometimes the defaults are optimized for something other than what you want, for example gaming when you want to look at text.