Mutual Fund Service Fee Payments
Our Relationships with the Mutual Funds
Nationwide® Retirement Solutions, Inc., offers a variety of unregistered group variable annuity contracts and mutual fund platforms (collectively referred to as “retirement products”). Those retirement products are sold exclusively in the public sector retirement markets through NRS’s life insurance and trust company affiliates (collectively referred to as the “Nationwide companies”).
The variable accounts, trust accounts, or custodial accounts (the “Accounts”) that accompany the retirement products offer investment options, and purchase and sell shares of certain mutual funds in the aggregate each day so that the performance of the investment options corresponds to the performance of those mutual funds. When the Accounts aggregate these transactions, the underlying mutual fund does not incur the expense of processing individual transactions it would normally incur if it sold its shares to the public directly. The Nationwide companies incur these expenses instead.
The Nationwide companies also incur the distribution costs associated with selling the retirement products, which benefits the mutual funds by providing contract owners and participants with investment options that correspond to the underlying mutual funds.
An investment adviser or subadviser of a mutual fund or its affiliates may provide the Nationwide companies with wholesaling services that assist in the distribution of the retirement products and may pay the Nationwide companies to participate in educational and/or marketing activities. These activities may provide the adviser or subadviser (or their affiliates) with increased exposure to persons involved in the distribution of the retirement products.
Types of Payments the Nationwide Companies Receive
In light of the above, certain underlying mutual funds and their affiliates make payments to the Nationwide companies (the “payments”). The amount of these payments is typically based on an agreed upon percentage times the amount of assets that the Accounts invest in the mutual funds. These payments are made for various purposes, including payments for the services provided and expense incurred by the Nationwide companies in promoting, marketing and administering the contracts and underlying funds. Nationwide may realize a profit on the payments received.
The Nationwide companies receive the following types of payments:
- Mutual fund 12b-1 fees, which are deducted from mutual fund assets;
- Sub-transfer agent fees or fees pursuant to administrative service plans adopted by the mutual fund, which may be deducted from mutual fund assets; and
- Payments by a mutual fund’s adviser or subadviser (or its affiliates). Such payments may be derived, in whole or in part, from the advisory fee that is deducted from mutual fund assets and reflected in the mutual fund charges.
Furthermore, the Nationwide companies benefit when assets are invested in Nationwide’s affiliated underlying mutual funds (i.e., Nationwide Variable Insurance Trust and/or Nationwide Mutual Funds) because their affiliates also receive compensation from the underlying mutual funds for investment advisory, administrative, transfer agency, distribution, and/or other services provided. Thus, the Nationwide companies may receive more revenue with respect to affiliated underlying mutual funds than unaffiliated underlying mutual funds.
The Nationwide companies took into consideration these anticipated mutual fund service fee payments from the underlying mutual funds when it determined the charges imposed under the retirement products (apart from fees and expenses imposed by the underlying mutual funds). Without these mutual fund service fee payments, the Nationwide companies would have imposed higher charges on their retirement products.
Amount of Payments the Nationwide Companies Receive
For the year ended December 31, 2015, for public sector retirement products, the maximum payments that the Nationwide companies received from the underlying mutual funds and their affiliates (as a percentage of the average daily net assets of the mutual funds attributable to the retirement products) and weighted average payments were:
|Maximum Percentage||Weighted Averages**|
|Public sector retirement products*||0.75%||0.234%|
*Excludes select public sector retirement plan assets where the Nationwide companies either do not have agreements to receive any payments from the mutual funds or do not retain payments from the mutual funds.
** Weighted averages are the product of amounts the Nationwide companies earned, divided by annual average mutual fund assets (using quarter end average balances). All mutual funds available in a line of business are included when determining average mutual fund assets, regardless of whether the mutual funds or their affiliates actually made any payments to the Nationwide companies during the year, subject to the exclusion noted above.
Most underlying mutual funds or their affiliates have agreed to make payments to the Nationwide companies, although the amount of the payment may vary from mutual fund to mutual fund. Some mutual funds may not make any payments at all.
The amount of the actual payments the Nationwide companies receive is based on an agreed upon percentage times the amount of assets invested by the Accounts in the mutual funds. As such, the Nationwide companies may receive higher payments from mutual funds that pay a lower percentage than from mutual funds that pay a higher percentage because of the level of assets invested by the Accounts.
Opportunities to participate in educational and/or marketing activities offered by investment advisers or subadvisers of the mutual funds or their affiliates to employees of the Nationwide companies are not taken into account in determining the amount of payments received.
Identification of Mutual Funds Offered in Our Retirement Products
The Nationwide companies identify a menu of potential mutual funds that correspond to the investment options for their retirement products. They may consider several criteria when identifying those mutual funds, including some or all of the following: investment objectives, investment process, investment performance, risk characteristics, investment capabilities, experience and resources, investment consistency, and fund expenses.
In some cases, the Nationwide companies identify mutual funds based on requests and recommendations made by retirement plan sponsors and/or their advisers. Another factor the Nationwide companies consider during this process is whether the mutual fund’s adviser or subadviser is one of their affiliates or whether the mutual fund, its adviser, its subadviser(s), or an affiliate will make payments such as those described above.
You should consider all of the fees and charges of a retirement product in relation to the features and benefits of that product when making your decision to invest. The fees of the mutual funds being offered as part of the overall retirement product should also be considered in your decision. Please note that higher product and mutual fund service fee payments and charges have a direct effect on the investment performance of your retirement savings.