The court further emphasized that the presentation materials the SCE investment staff, prepared for Plan Investment Committee meeting at which the Investments Staff recommended adding these funds to the plan, "contained no information about theinstitutional share classes." According to the court, "The Investment Staff simply recommended adding the retail share classes of these funds without any consideration of whether the institutional share classes offered greater benefits to the plan participants. Thus, the plan fiduciaries responsible for selecting the mutual funds (the Investment Committees) were not informed about the institutional share classes."

Specifically, the court said, the defendants did not present evidence of: the recommendations the investment consultant made to the investment committee; the scope of the consultant's review; whether the consultant considered both the retail and the institutional share classes; whether the consultant provided information to the investment committee about the different share classes; what questions were asked regarding the recommendations; and what steps the investment committee took to evaluate the consultant's recommendations. Thus, while reliance on a consultant's recommendations may be justified in some circumstances, in this instance the court could not conclude that such reliance was prudent or reasonable.

What Fiduciaries Can Do
It is imperative that employer plan fiduciaries establish best-practice governance standards relating to the identification and disclosure of "hidden" fees so they can demonstrate the robustness of their analysis and conclude that 1) the compensation paid directly or indirectly to investment and administrative service practices is no more than "reasonable," and 2) actions of the service providers are monitored to assure that any fee offset to which the plan is entitled is correctly calculated and applied.

"Reasonableness of fees" is not easily ascertained. Service providers normally disclose fees otherwise required to be disclosed, such as 12b-1 fees, but not indirect fees they receive from mutual-fund vendors, which are typically prevented from disclosure by agreements that service providers claim are confidential or proprietary. Accordingly, it may be difficult to conduct a forensic investigation and the "adversarial" negotiation necessary to identify embedded and undisclosed fees.

That is the purview of an independent ERISA attorney. In-house and plan counsel, as well as accounting or consulting firms, may not be able to offer confidentiality as a result of the "fiduciary exception" to attorney-client privilege. Making all efforts to establish and preserve confidentiality is critical in the event of litigation for excessive fees that may come to light as the result of a forensic plan-expense review.

Jeff Mamorsky is co-chair of the global benefits practice at law firm Greenberg Traurig.

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