Fees -Nationwide

[k man]

Is anyone aware of a new lawsuit involving nationwide for allegedly making too much money on certain mutual funds. the details i have are very scetchy but it could have something to do with sub-ta or subsidies the are paying record keepers.

[david rigby]

I was given an article from the January 7, 2002 issue of Investment News. Suit has been filed in federal court in Hartford Conn.

[k man]

do you know how i can get that article. is it online?

[david rigby]

Browse around. Try some search engines. Try newpapers where a story might appear.

http://www.investmentnews.com/

http://www.pionline.com/

http://www.ctnow.com/

[k man]

i actually found a mention of the case in plansponsor.com but now id like to find out the status of it if anyone out there is aware.

[MGB]

It has only been "filed." That means we are many, many months (if not years) away from resolution.

It is a suit charging that revenue sharing in general should be declared illegal (using prohibited transaction laws). It is not something that Nationwide, per se, is doing wrong.

It sounds like a frivolous suit that isn't going anywhere.

The news stories to date have been one-sided by those that filed the suit and their constituents. Therefore, they make the situation sound like this is some type of great rip-off of everyone, everywhere, etc.

Employee Benefit News carried the story last week.

[k man]

i know it is in the early stages but plansponsor.com pointed out that there are many in the industry that are against these fees.

[david rigby]

Also, note that many of the public statements made by the plaintiff's attorney use the flammatory word "kickback". Not really accurate, but it is a word that gather attention and emotion.

[k man]

i think the article incorrectly groups all sub t/a arrangments as if they are same making the point that the fees are coming out of participant assets and as such should be reimbursed. This is not in fact the case in many of the arrangements out there. Often the fee is something that is paid to the TPA in order to compensate them for the expenses associated with accounting and record keeping on the participant level. the fees are paid directly by the fund and not out of assets.

[Jon Chambers]

Several years ago, in the Aetna and Frost opinion letters, the DOL listed disclosure requirements needed to avoid prohibited transaction concerns when administrative service providers receive and retain revenue sharing from mutual funds (Aetna was just a recordkeeper, Frost also acted as trustee, and in some cases, investment advisor). In my experience, very few administrative service providers satisfy the disclosure standards listed in the Aetna and Frost letters. Among other things, the standards require that the fund revenue sharing structure be fullly disclosed, that fees be offset dollar for dollar for revenue sharing received, and that the offset procedure be fully accounted for in written form to the plan sponsor. My guess is that Nationwide did not meet these standards. Consequently, the case may turn on whether or not the Aetna and Frost letters represent the "law", or whether they are simply a recommended approach.

Incidentally, following the filing of the Nationwide suit, I'm starting to see other providers improve their disclosure relating to their revenue sharing procedures.

I'd suggest that in light of the Nationwide case, all TPAs and administrative service providers that accept mutual fund revenue sharing should review the Aetna and Frost opinion letters to determine whether their disclosures meet the standards described by the DOL.

[david rigby]

Jon,

if available, can you provide links to these opinion letters? Thanks.

[k man]

The article on plan sponor implies that the plaintiffs are attempting to go beyond frost and aetna (the applicable DOL guidance) by seeking to have all payments under any circumstances deemed illegal payments unless they are paid back to the participants

[Jon Chambers]

Go to the link below and select "Advisory Opinions and Information Letters" Year is 1997

Frost(97-15A):http://benefitsattorney.com/cgibin/framed/...gi?ID=50&id==50

Aetna(97-16A):http://benefitsattorney.com/cgibin/framed/...gi?ID=50&id==50

While I don't claim to be familiar with the Nationwide case, I'm not sure that the Nationwide's plaintiffs claim that all revenue sharing should be reimbursed is inconsistent with the Frost/Aetna opinion letters. In the letters, the DOL appears to indicate that if you don't provide Frost/Aetna type disclosure, you may have a prohibited transaction. If I were arguing for the plaintiff's, I'd assert that Nationwide didn't make required disclosures, hence taking revenue share was a PT, hence, PT must be cured, so they need to give all the money back. Whether or not this flies will be a matter for the courts to decide.

[Guest consultant]

I would agree with you Jon. No one has said revenue sharing was illegal. They said it was illegal in the way they (Nationwide) went about it. If you go back ten years and look at the Nationwide Opus product, it used mainly American Funds. 1% finders fee, .50% 12-b1 and .10% sub t/a. American funds pulled out, they added outside funds and slowly over the next 6 years, they added their own funds managed by four subsidiary companies, all of which revenue shared to Nationwide with the exception of the Nationwide named funds.

If you want to see exactly what I am talking about, get a fund sheet for one of Nationwide's Destination funds. You will see that they mainly investment in there own mutual funds. They have built multiple layers paying multiple 12-b1 and sub/ta fees. Participant's end up getting a pile of junk in which Nationwide gets paid 1% in 12-b1 fees plus the charge a wrap fee for the fund which invests in their own funds, the participant pays and their advisory firm gets paid for the management. If you add the numbers up, Nationwide gets paid around 2.6% in fees. Stealing? You will have to make that determination. These Destination funds are a Destination for someone, mainly the top employees within Nationwide and not the participants. Or they are Destinations for the participant, Destination to work longer than expected because it is impossible to overcome such a large expense.

Here are the links to 97-15 & 97-16 (Frost & Aetna) from the DOL

http://www.dol.gov/dol/pwba/public/program...ry97/97-15a.htm

http://www.dol.gov/dol/pwba/public/program...ry97/97-16a.htm

As for proper disclosure, very few providers provided any disclosure of revenue share including Nationwide. After the suit was filed many have made disclosure attempts. Nationwide added disclosure info in April of 2000, but it is very broad and vauge. It says they may get paid 0% to .65% from fund houses.

Frivolous lawsuit? If you think prohibited transactions are not illegal than the suit may well be. If you read 97-15a & 97-16b, it might clarify things. Nationwide's problem is greater than most providers since the fall under both letters as a plan sponsor and as a trustee in regards to Nationwide Trust Co.

Kickback? What else would you call it? A service provider provides a plan to a broker or TPA to sell. In return, a mutual fund pays the service provider for placing the business with them? Sounds like a kickback to me.

Revenue Sharing was designed to offset service provider expenses, not generate excessive profits. Expenses would be recordkeeping expenses etc..... Nationwide and many other providers already bill or deduct recordkeeping (accounting) fees from particpant accounts. Why should a participant pay for this service twice?

[k man]

I think it is important to determine whether the subsidies are coming directly from participants accounts as opposed to a payment made at the fund level for services performed in connection with participant level record keeping.

If you read the Frost opinion you will note that it is only a prohibited transaction when a fiduciary is receiving the subsidies. if the record keeper is not a fiduciary the guidance says its ok to receive and not a PT. also, simply because the record keeper charges a record keeping fee in addition to receiving subsidies does make not make the subsidy a "kickback." in other words, but for the subsidy the record keeping fee would be greater.

All that being said, disclosure and reasonableness of fees are still important factors.

[Guest consultant]

You are totally correct. The key to the suit is discretion and whether or not Nationwide or any other provider has discretion over the accounts.

As for where the money comes from is the question. Most run pooled accounts and the subsidies are paid from the management fees and not directly from participant accounts which does not constitute a PT, unless the provider is a fiduciary.

Revenue share is part of the retirement arena whether anyone likes it or not. The problem with it is that many providers are being paid excessive fees that are not being disclosed to participants. 97-15a & 97-16a states "either as a dollar-for-dollar offset against the fees the Plans would be obligated to pay". Do you think this is being done by Nationwide? or anyone other provider? The answer is probably not.

If you go back to when revenue sharing came about, early 90's, with Hewitt and Hazlehurst & Associates, 30bp's covered offset their recordkeeping expenses. Today, why would it take 40 or 50bp's? 386-33 computer were among the fastest workstations in 1992 and IBM Main frames cost $2million dollars. Today, you can buy off the shelf software and a Dell, IBM or HP server that is 10000 times faster for $20000. Recordkeeping tasks which took 8 hours to complete in 1992 can be done in 2002 in 10 minutes. So why have the subsidies increased rather than decreased?

Don't get me wrong, I have no problem with revenue sharing if the proper disclosure is followed and the fees are reasonable. I feel the problem is that many providers are using revenue share as a subsidy for recordkeeping, marketing and nice trips for the brokers and TPA's who sell their products.

[k man]

It seems as though the disclosure is going to be required at some point regardless of whether or not the providor is a fiduciary. when i first got into this business a few years ago I was surprised to note that there were so many potential regulators (SEC, NASD, DOL and IRS), which for the most part are not working together when it comes to the investment aspect of retirement plans. I think this has to change. although the Enron matter is unrelated, it seems to be more evidence of the need for better guidance in the investment space of retirement plans.

[Guest consultant]

I have worked in this business for a "few" years myself. You are right that disclosure is needed.

I think the fed's are trying to work together more today and I think this will increase as we go forward. Hopefully, this working together thing will work better than what has happened with the DOL and IRS's working together has.

I think the ENRON problem will bring some changes to the qualified plan investment area.

[k man]

has anyone heard anything about that Nationwide case recently?

[Guest consultant]

Court documents show that Nationwide has filed for motion to dismiss with no other activity in the last few months and the motion is very weak. $50 says it goes forward and it makes the front page of every major news paper plus complete news coverage at 6 & 10... any takers?

I bet the World Series crap they are selling is next. Anyone looked at that stuff? It provides fiduciary protection, but for who? It only puts the plan fiduciary in a worse position than he is in today. It does provide "layers" of protection, for Nationwide that is. The plan sponsor is hung out with ALL of the liability.

They refer to providing protection via an Institutional Trustee but I am sure that the word they are really looking for is DISCRETIONARY Institutional Trustee, which is a BIG difference and the trust document shows the have NO discretion. One would have to assume that there they go again, talking out of both sides of their mouth and preying on the lack of knowledge of the average plan sponsor.

Nationwide should have called this thing Cricket, Squash or even Wrestling rather than referring to batting averages and America’s past time plus using a trademark they can not register. I vote for Squash since that is what is going to happen when the public finds out that they have been duped --- again. And that the 3% that they are paying is being spread to ALL the parties involved and they still add no value and under perform the market.

There are those of us who really know the answers B and really can provide complete and accurate solutions for clients, which can take a World Series batting average form .500 to .100 in just one client meeting.

Pass it on to the decision makers at Nationwide since we know you are reading this like everyone else – change the name to SQUASH

Anyone else?

[actuarysmith]

I am unsure whether to "chime in" on this thread or not - apparently there are some hot and bothered folks looking at this column.

I am a principal in a TPA that uses Nationwide as one of our primary strategic alliances.

As many of you know, they (Nationwide) pay an administrative override to TPA's.

Some of the responses to this thread imply that they are kickbacks or some sort of scam designed to incent TPA's to steer plans their way.

First of all, most of our referrels come from brokers, agents, and financial advisors who already know what investment product they want to use. As a TPA, we have limited influence in that decision. Therefore, this would be a weak incentive at best.

Secondly, Nationwide requires TPA's to perform many functions that other insurance companies and mutual funds handle in their own home offices (i.e. proposals, enrollment kits, getting contracts produced and signed, and discussing pricing and compensation with financial advisors).

Our firm refers to this as contract administration reimbursement fees. Nationwide has fewer people in home office than they would otherwise need if they were handling these functions. They are passing along the savings as a reimbursement to TPA's for the additional time and expense incurred handling these cases.

I've lost track of the number of times that a disgruntled client confuses our functions as adminstrator, with that of the financial institution -due to this unusual relationship. In several instances, we have had to waive or reduce our fees due to a mistake or problem that had nothing to do with our administrative services.

These overrides are anything but gravy money, as some would imply. Let me assure you that at the end of day - it is well earned by the TPA.

However, my real point is that these overrides do not equal extra contract expense - it would have had to been charged by Nationwide in some other fashion anyway to pay for the services being provided. ( All financial institutions have these fees. There is no way to get around these expenses, unless you drop services).

I want to make it clear that we are not upset or disgruntled with Nationwide. Nor are we defending the way they do business.

We have a large number of plans with Nationwide, and we have been very successful. The vast majority of our plan sponsors that use Nationwide are extremely happy with their retirement plan.

If you compare features, fund selection, Multi-family platform, expense ratios, and returns, it is a tough program to beat for small to medium size retirement plan sponsors. There are not that many institutions providing this sort of a platform to smaller employers at any price.

In closing, I just would like to express that fact that I am tired of people thinking that TPA's should somehow be ashamed of getting the override, or reducing the fees they normally charge because of the perception that this is easy money - it is not. It is well earned............

[Guest consultant]

Mr. Smith, you too may have not really understood part of the messages here. I never referred to TPA's taking subsidies as being bad, immoral or even illegal, at least within specific parameters. ERISA allows you to receive resonable compensation for services rendered. Never once did I say anything about TPA's. I have worked with the columbus boys myself, I totally understand what you are saying. YOU DO A LOT OF WORK that they do not.

So why do you still work with them? I beg to differ with you, several other providers provide more service to you and the client for a cost which is 25% less than Nationwide. How do they do it??? Simple, they use the revenue sharing payments to provide the services are stated under the FROST and AETNA Letters. Go read them and you will have a better understanding.

http://www.dol.gov/dol/pwba/public/...ry97/97-15a.htm

http://www.dol.gov/dol/pwba/public/...ry97/97-16a.htm

Why do you think they are being sued? Did they tell you in a meeting that this was false or something?? Only time will tell.

The real point is that the override is a contract expense. If the AMC is 1.5%, it includes .30% for the TPA, if it was not paid, the AMC would be 1.2%. So the participants are compensating you whether you want to admit it or not. They tried to hide the payments by not disclosing the dollar amounts on your commission statements don't they. Are you even sure they are not shorting you since it only gives a total on the last page of the statement?

Contract fees apply to insurance contracts and not mutual fund or trust products. Trust companies and mutual funds programs generate revenue through management, 12(B)1, shareholder servicing, finders and trustee fees.

And for making it up somewhere else, you are dead on, but they are already doing that. Take a look at the prospectus and see how many funds offered have 12(B)1 fees, look for sub t/a's, shareholder servicing and finders fees. You will see that they are already making up the .30% to .40%. That would put their gross margin say in the 5th contract year around 1%. Is your margin 1% of 100 billion dollars??

I have nothing against you and I know TPA's are the hardest working piece of the retirement plan equation. The broker makes all the money and you get enough to feed your family, I have been there and done that.

Again, the problem is the service provider's who are praying on the lack of knowledge of the plan sponsor, tpa and broker while they make all the money.

good luck

[actuarysmith]

Consultant,

Last sentence-I think you meant that they are "Preying on" not "Praying on".

You covered a lot of ground in the last thread.

I am aware that the contract charge is greater due to the TPA override. However, if that override was not there, I maintain that there would simply be expenses built in somewhere else in the contract.

When clients ask me to compare the Contract charge to the straight expense ratio's of a single mutual fund family -

I always shoot straight (at least I think I do......??) and tell them that the contract charge is above the normal expenses of the underlying mutual funds. This results in a higher total cost. However, the difference is that with a platform ala Nationwide, the clients have access to multiple fund managers all under one roof.

If we (the client and TPA) were to try and duplicate this by simply offering a mix of specific mutual funds from unrelated families, we would have a nightmare of a plan (in terms of administrative issues and cost) on our hands.

Am I missing something? (I am sure you will tell me that I am. I would appreciate your opinion.)

[Guest consultant]

Mr. Smith,

I did mean preying; Dave Baker needs to add spell and grammar checking to this board .

I agree with everything you said in your response. Expenses are not charged here, they would charge them over there. My point was that there are provider's that are efficient and use revenue payments to offset expenses to the plan while offering more services than Nationwide does like enrollment meetings etc. I provide consulting services to medium to large plans and I have analyzed every piece of almost every product vendor. If you look at ManuLife for instance, they do enrollment meetings, prepare enrollment materials, provide complete fund manager due diligence quarterly and have better funds. Did I mention there asset management charges average 25% less than Nationwide? They even replace funds when needed. Call Mr. Atwell and ask him what due diligence process they go through when choosing funds? Then ask for the documentation process in writing.

Now take a look at the "new" actively managed account program they are using. Have you looked at it? They are now charging a fee to provide active asset allocation for participants. It is nothing more than investment modeling for an outrageous fee. ManuLife does this among other providers for a fraction of the cost.

They are also "providing" fiduciary protection for the client, which is a total joke. The documents specifically state that they assume no fiduciary liability and have no discretion. You can transfer liability by using a discretionary institutional trustee who accepts the liability and becomes the named fiduciary. An Institutional Trustee is a co-fiduciary only because they hold assets and liability would be limited to basically theft. The layers of protection protect Nationwide, not the client, which now has increased liability since a non-pro (business owner) is responsible for choosing funds and is still the named fiduciary. If a lawsuit is brought by a participant, it must be filed against the name dfiduciary (Mr. Business Owner). Sure Nationwide would be named but they have assumed no liability and your client choose the funds.

You are right; duplicating a product on your own is very expensive, especially if you decide to provide daily val on your own.

Like I said, the problem is with many of the product vendors. If you look at the world series product and then go take a look at the 401(k) Company's Fiduciary website, you will notice that the information appears to be the same between the two. Since Nationwide owns the 401(k) Co., it becomes clear that they purchased them for the technology and is now selling it as their own.

Email me if you wish to discuss any of this information.