Nationwide Financial of Columbus, Ohio, has rolled out a new program that allows registered investment advisers (RIAs) and certified public accountants (CPAs) to sell its retirement plans for a fee rather than a commission, making it the first major 401(k) provider to do so. Others are likely to follow as the entire financial services industry moves towards fee-based business.
Nationwide's move gives fee-only RIAs and CPAs, many of whom do not sell products on commission, an important entree into the 401(k) planning business. "RIAs and CPAs that are fee-only can't offer 401(k) advice in any mass at this point," said Michael Scarborough, CEO of The Scarborough Group of Annapolis, Md., and an expert on 401(k) plans.
But there's more than one catch. Because Nationwide offers mostly commission-based products, it is little known among fee-only advisers, said Chip Roame, a principal with research and consulting firm Tiburon Strategic Advisors of Tiburon, Calif. That means it may be hard for Nationwide to attract fee-only advisers. Meanwhile, the purest of the fee-only advisers, like those at the National Association of Personal Financial Advisors (NAPFA) of Arlington Heights, Ill., feel the model is "contaminated" because registered representatives will still be pushing Nationwide products. Indeed, NAPFA spokesman Gary Schatsky suggested Nationwide's program is simply a commission-based model in disguise.
The real "home run" for Nationwide, Roame said, will be "transitioning" advisers, those who are mostly commission-based but are trying to boost the fee-side of their business. Some three-fourths of registered investment advisers - around 60,000 reps - are "pushing down the fee path," Roame said. Because they work primarily in commission-based packaged products, they will know Nationwide well and won't have the "ethical NAPFA view of the world," he said.
Under Nationwide's program, RIAs and CPAs will advise business owners on how to structure their plans in terms of investment options and features. Nationwide will offer advisers more than 500 investment options wrapped into a program with record keeping, administration through 200 local plan administrators and a fiduciary package. The local plan administrators will do the design work, and provide the local administrative and compliance support that's required for the plan.
RIAs and CPAs can select from among several fee-based options, including a percentage of plan assets, a specified fee per participant or a specified fee for the plan. Once these fees are determined for the prospective quarterly period, they will be deducted from the assets of the retirement plan on a pro rata basis, said Steve Rose, vice president and product manager of retirement plans for Nationwide.
Nationwide is one of the largest providers of defined contribution plans in the country, based on number of plan participants, and its closest competitors, Automatic Data Processing (ADP) of Roseland, N.J., and The Principal Financial Group of Des Moines, Iowa, do not yet offer a fee-based payment option. But Scarborough said he wouldn't be surprised if they created such programs soon. Scarborough estimated that there's a lot of juice left in the 401(k) advice market, with 20 million to 25 million people who aren't yet paying someone to manage their retirement money.
Nationwide targets the small-business end of the market, providing retirement plan programs to companies with fewer than 100 employees. That's where independent RIAs and CPAs are likely to find clients. Larger companies often get retirement advice from institutional investment consultant firms that don't also sell products, according to Matt Schott, senior analyst with Tower Group of Needham, Mass.
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