Bohnak v. Marsh & McLennan Companies Second Circuit 2023 examines a critical ERISA fiduciary‑duty dispute that clarified how plan sponsors must monitor and disclose fees associated with investment options in employer‑sponsored retirement plans. The Second Circuit’s decision underscores the heightened scrutiny courts apply when plan administrators allegedly prioritize revenue‑sharing arrangements over participants’ best interests, offering guidance for employers, fiduciaries, and litigants navigating similar claims.
Introduction
The case of Bohnak v. Marsh & McLennan Companies, Inc., decided by the United States Court of Appeals for the Second Circuit in 2023, arose from allegations that the defendant, a global professional services firm, breached its fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) by offering excessively priced mutual funds in its 401(k) plan and failing to adequately disclose revenue‑sharing payments to plan participants. The appellate court’s ruling refined the standard for evaluating whether a plan fiduciary acted prudently and loyally when selecting and monitoring investment alternatives, emphasizing that cost‑effectiveness and transparency are integral components of the prudence requirement.
This is the bit that actually matters in practice Simple, but easy to overlook..
Background and Facts
Marsh & McLennan Companies (MMC) maintained a defined‑contribution retirement plan (the “Plan”) that offered participants a menu of mutual funds, including several actively managed equity and bond funds. Plaintiff‑appellee John Bohnak, a former employee and Plan participant, contended that:
- Excessive Fees – The Plan’s investment lineup included funds with expense ratios substantially higher than comparable index funds or lower‑cost actively managed alternatives available in the market.
- Revenue‑Sharing Arrangements – MMC received indirect compensation (often termed “12b‑1 fees” or “sub‑transfer agent fees”) from the fund families, creating a potential conflict of interest.
- Inadequate Disclosure – The Plan’s summary plan description (SPD) and quarterly statements failed to clearly convey the amount or nature of these revenue‑sharing payments, preventing participants from making informed decisions.
Bohnak alleged that these facts demonstrated a breach of the fiduciary duties of prudence and loyalty under ERISA §§ 404(a)(1)(A) and (B), seeking disgorgement of excess fees and injunctive relief to replace the costly funds with lower‑cost options.
Procedural History
- District Court: The United States District Court for the Southern District of New York granted summary judgment to MMC, holding that Bohnak failed to show that the Plan’s investment choices were imprudent or that MMC’s receipt of revenue‑sharing payments constituted a prohibited transaction under ERISA. The court emphasized the presumption of validity afforded to plan fiduciaries’ investment decisions and found the disclosed fees adequate under the plan documents.
- Appeal: Bohnak appealed to the Second Circuit, arguing that the district court misapplied the prudence standard, improperly shifted the burden of proof, and overlooked evidence of excessive costs and inadequate disclosure.
- Oral Argument: The panel focused on the interplay between ERISA’s prudence requirement, the fiduciary’s duty to monitor costs, and the sufficiency of disclosures concerning revenue‑sharing arrangements.
Legal Issues
The Second Circuit framed the appeal around three core questions:
- Prudence Standard – Whether a plan fiduciary’s selection and continued offering of investment options with higher-than-necessary expenses can be deemed imprudent when lower‑cost alternatives exist.
- Revenue‑Sharing Conflicts – Whether receipt of indirect compensation from fund providers creates a conflict of interest that violates the loyalty duty, absent proof of self‑dealing.
- Disclosure Adequacy – Whether the Plan’s SPD and periodic statements satisfied ERISA’s disclosure requirements regarding fees and revenue‑sharing payments.
Court’s Analysis
Prudence and Cost‑Effectiveness
The court began by reiterating that ERISA § 404(a)(1)(A) obliges fiduciaries to act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use.” The Second Circuit emphasized that prudence is not a static test; it requires an ongoing, comparative analysis of available investment options.
Drawing on precedent such as Tibble v. Edison International (2015) and Hughes v. When a lower‑cost fund with comparable risk/return characteristics is readily available, the continued retention of a higher‑cost fund may be deemed imprudent unless a justified, documented reason exists (e.That said, g. Northwestern University (2017), the court held that a fiduciary must consider both the performance prospects and the cost structure of each option. , unique manager expertise, liquidity needs, or plan‑specific constraints) No workaround needed..
The panel found that Bohnak presented sufficient evidence—including fee comparisons, fund prospectuses, and expert testimony—that several of the Plan’s equity and bond funds carried expense ratios 0.50%–0.Here's the thing — 75% higher than comparable index funds or lower‑cost active funds. The court concluded that a reasonable fiduciary would have undertaken a prudent cost‑benefit analysis and, absent a compelling justification, would have replaced or supplemented those options.
Revenue‑Sharing and Loyalty
Regarding the loyalty duty under ERISA § 404(a)(1)(B), the court acknowledged that receipt of revenue‑sharing payments is not per se prohibited. Even so, it stressed that such arrangements create a potential conflict of interest that fiduciaries must manage transparently. The Second Circuit held that a fiduciary must:
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Identify any revenue‑sharing arrangements with investment providers Simple, but easy to overlook..
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Assess whether those arrangements could unreasonably influence fund selection.
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Mitigate the conflict by either eliminating the payments, negotiating lower fees, or providing dependable disclosure that allows participants to evaluate the impact
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Mitigate the conflict by either eliminating the payments, negotiating lower fees, or providing solid disclosure that allows participants to evaluate the impact on their accounts Practical, not theoretical..
The court found that the Plan’s fiduciaries had failed to document any substantive review of the revenue-sharing agreements with the fund families. Meeting minutes and RFP materials showed that the Committee discussed fund performance and expense ratios but did not separately analyze whether the 12b-1 and sub-transfer agency payments—which ranged from 0.35% of plan assets annually—created an incentive to retain higher-cost share classes. 15% to 0.Because the fiduciaries could not demonstrate that they had considered lower-cost, revenue-sharing-free alternatives (such as institutional or R6 share classes available on the same platform), the panel held that a triable issue of fact existed on whether the loyalty duty was breached Easy to understand, harder to ignore..
Disclosure Adequacy
On the third issue, the court applied the “materiality” standard articulated in CIGNA Corp. That said, v. And amara (2011) and the Department of Labor’s 2012 fee-disclosure regulations (29 C. F.Worth adding: r. § 2550.404a-5). The SPD and quarterly statements disclosed the existence of revenue sharing in boilerplate language—“certain funds may pay revenue sharing to the recordkeeper”—but did not quantify the dollar amounts attributable to each fund, identify which share classes generated payments, or explain how those payments reduced net returns to participants.
Not the most exciting part, but easily the most useful.
The Second Circuit held that such generic disclosure was insufficient. Participants must receive “specific, fund-level data” that enables them to compare the all-in cost of each investment option. Because the Plan’s statements omitted the per-fund revenue-sharing amounts and the availability of lower-cost share classes, the court concluded that the disclosure claims could proceed to trial That's the part that actually makes a difference. No workaround needed..
Holding and Remand
The Second Circuit affirmed the district court’s denial of summary judgment on all three claims. It remanded for further proceedings consistent with its opinion, instructing the lower court to:
- Allow discovery on whether the fiduciaries’ monitoring process was “procedurally prudent” given the magnitude and duration of the cost differentials.
- Evaluate whether the revenue-sharing arrangements were adequately vetted and whether any documented justification existed for retaining the higher-cost share classes.
- Determine whether the disclosure deficiencies were material to participants’ investment decisions, applying an objective “reasonable participant” standard.
Conclusion
Bohnak v. MassMutual reinforces that ERISA’s prudence and loyalty duties are not satisfied by passive reliance on a recordkeeper’s platform or by generic fee disclosures. Fiduciaries of mid-sized plans—often assumed to lack the use of mega-plans—are expected to negotiate share-class availability, document their cost-benefit analyses, and provide participants with transparent, fund-specific fee data. The decision signals that courts will scrutinize both the process and the output of fiduciary decision-making, and that revenue-sharing arrangements, while permissible, demand affirmative conflict-management steps. For plan sponsors and committees, the message is clear: prudence is an active, ongoing obligation, and loyalty requires more than a footnote in an SPD.
