Nationwide is "on your side" as the financial services giant's corporate slogan goes, but Lou Haddock doesn't think so. In a class action originally filed in the United States District Court in Connecticut 2001 Haddock, a trustee of a retirement plan advised by Nationwide, charges it with accepting "revenue sharing payments" from mutual funds as the cost of being included as investment options in its retirement plans. Haddock claims the receipt of these payments violates the Columbus, Ohio-based company's "fiduciary duty," which Haddock alleges is the duty to act solely in the best interest of the plan participants. In a previous blog post, I discussed similar claims against another insurance company, John Hancock.Nationwide denied any wrongdoing and denied that it was a fiduciary to the plan. In a preliminary ruling issued Nov. 6, 2009, the Court found Nationwide "may be a fiduciary", but this really begs the issue: Whose side is Nationwide on when it selects investment options for 401(k) plans?
A Big Retirement Market Player
I went to the source and made an inquiry directly to a spokeswoman for Nationwide, a big player in the retirement market covering about 900,000 participants in 23,000 401(k) plans.
Although Nationwide selects investments for these plans, its position is that it is not a fiduciary to plan participants. This means that Nationwide is free to accept "revenue sharing" payments from mutual funds that want to be included in the list of investment options available in its plans. The Nationwide spokesman said "these payments are an industry-wide practice and help Nationwide offer cost-effective retirement programs."
I disagree. These payments ensure that Nationwide's plans will not include low-cost index funds because these funds will not "pay to play."
Ducking Financial Responsibility
It would be far better for the 23,000 participants in Nationwide's plans if the funds it selected were all low-cost index funds in various asset classes (and sub classes), like stocks, bonds, real estate and commodities. A non-conflicted adviser would offer plan participants a limited number of pre-allocated portfolios of these asset classes and would assist them in selecting the portfolio with the right risk level for them.
There would be no "revenue sharing payments." Record keeping and administrative costs would be fully transparent and billed separately to the plan sponsor or allocated to the plan participants.
Nationwide and most other fund families duck fiduciary responsibility because their fund selection practices are often inconsistent with the best interests of the the plan participants. When a plan participant wises up and files a lawsuit alleging the fund options are not in their best interest but were selected because of "revenue-sharing" payments made to the plan adviser, the adviser throws up its hands and disclaims all liability. Who is left holding the liability bag? The employer, who typically relies on the adviser to make investment decisions and assumes the adviser will step up to the plate in the event of litigation.
Should Embrace Full Fiduciary Responsibility
An adviser to a 401(k) plan should embrace full fiduciary responsibility for the selection, monitoring and replacement of the investment options in the plan, rather than run from it. A real fiduciary is known as an "ERISA 3(38)" fiduciary. Hard-working Americans struggling to hold on to their jobs and retire with a semblance of dignity deserve no less.
Nationwide should get on their side.
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