Ala. Attorney General Takes Over 457 Plan Fee Probe

Forbes reported that King has already asked Alabama Securities Commission (ASC) Executive Director Joe Borg to delay any further work on the commission’s ongoing investigation of Nationwide’s involvement with the state’s 457 program, but Borg then opted to pull the ASC out of the picture in favor of King’s broader investigative authority. 

The news report said Borg’s agency had worked out a tentative deal calling for Nationwide and the Alabama State Employees Association to pay just more than $6 million into the 457 accounts of the 21,000 participants using the Nationwide-administered plan.

King told Forbes the matter needed to be reviewed under more than securities law including tax and insurance mandates, and that he wanted to bump up the settlement amount.

According to an ASC report of its probe into the “endorsement fee” payments by Nationwide to the Alabama State Employees Association (ASEA), which oversees the $382-million retirement savings program, and Public Employees Benefits Corporation (PEBCO), it’s for-profit subsidiary, the “endorsement fee” began in 2001 and was funded by Nationwide, reducing the amount of interest it paid on the fixed option of the plan by 20 basis points. The 2001 contract was for three years and would increase the fee paid to ASEA to $1.05 million in 2002, and $1.1 million in 2003.

“Although the current plan is better for the state employees than the previous plan, the involvement of the ASEA has cost approximately $10 million since 2000 from participant’s retirement accounts,” the ASC report said. “The funds paid to ASEA/PEBCO do not appear to be justified, and are in fact mostly profits to the association. It is also certain that it is not disclosed to state employees who participate in the plan that funds they believe are going into a retirement account are being used to subsidize the ASEA.”

Funneling Payments

ASC investigators charged that the creation of PEBCO as a for-profit entity and the pattern of funneling money through PEBCO that was eventually transferred to ASEA was a way to support the employee association's activities.

"It is clear the ASEA intended to profit from the State Employees 457 plan because of the incorporation of the for-profit company PEBCO. Had the intent been to only recoup expenses, that function could be accomplished without the need for a for-profit corporation to pass the revenues through," the ASC report stated. "It is also apparent that the ASEA is using the profits, and benefits associated with the 457 plan, to pay operational expenses, conduct lobbying activities, and to increase membership in the ASEA."

The ASC report said its probe was sparked by a separate investigation regarding suitability of variable annuity investments being sold by Nationwide within tax-deferred retirement accounts and that "Nationwide's involvement regarding the state 457 plan was discovered." State personnel officials also contacted the ASC requesting an investigation “advising of (their) concerns.”

Officials at Alabama's personnel board were supposed to sign off on details of the deferred compensation plan, but the ASEA put details of the deal for receiving the Nationwide payments into a separate contract, the ASC report said.

Nationwide Financial Services spokeswoman Carah Brody told Bloomberg that Nationwide Retirement Solutions “is an ethical company who takes its regulatory responsibility very seriously” and continues to cooperate with regulators. Brody said Nationwide Retirement Solutions conducted its own investigation “to ensure our business practices and procedures are in compliance.”

The ASC report is available here.