By Allen Giese, CLU®, ChFC®, ChSNC®

Most FRS Special Risk participants have access to a deferred comp plan. And it seems to us, the vast majority of deferred comp plans, at least that we see, are held at Nationwide. Now, Nationwide offers something in most of their plans called the ProAccount, which, in Nationwide’s own words, “is a managed account service, available for an additional fee, designed to help take the guesswork out of retirement investing.” In a nutshell, the ProAccount will pick your investments for you—for a fee. Is it worth it? Is this a good decision to add the ProAccount to your plan?

Like a lot of things, there are good things about the ProAccount and then some things that, well, might make you feel like it’s just not for you. Let’s look at what’s good about it first.

Clearly, the strength in the program is in the idea that Nationwide and Wilshire Advisors (which is the advisory firm attached to the program, according to Nationwide’s website), that these folks probably know more about modern portfolio theory and how to capture global capital market returns than the average firefighter, police officer, and corrections officer. Just like you probably know a whole lot more about firefighting and public safety than they do.

And at least—again, in our experience—we’ve found when a lot of deferred comp participants select their funds on their own, it’s usually not based on any sort of sound market theory. So, they’re probably better off, in the long run, using a program like this. For most folks, they’ll end up with a much better diversified plan that has a better chance of delivering market returns than what they probably would have come up with on their own.

But now let’s look at the negatives. First, there’s the cost. Nationwide charges you an additional 0.65% to add this program to your deferred comp account. Now, that may not seem like a lot at first glance, but I can tell you, that’s enough to where you better be getting something substantial in return for it.

For example, let’s say you have a $100,000 deferred comp account. At 0.65%, that’s $650 in money lost to fees, your money that’s not in the account working toward your future. Factor in growth you’ll miss out on in the future against those dollars, and it adds up in a hurry.

And of course, the obvious question is, will the investments Nationwide chooses for you do at least 0.65% better per year going forward than what you would have done? That’s one of those questions you’ll never really know the answer to, but Nationwide is saying on its website, as an institutional investor, studies have shown that they do better than the average asset allocation fund investor.

I don’t disagree—but I also know that the average asset allocation fund investor takes far too little risk and basically sets himself or herself up for low returns, where the ProAccount has a significant amount of equity exposure—more than most asset allocation fund investors—and should be getting a higher return. It’s not unlike comparing apples to oranges. It’s just not a good comparison—and it’s an easy thing to fix!

It's not only the 0.65% that is part of the cost. There’s also an additional cost you pay because Nationwide isn’t necessarily using the lowest-cost funds available on the platform.

Let me give you an example. We recently analyzed the ProAccount investment choices and the fees of a participant in the Miami Dade 457 plan. By the way, keep in mind that the fund lineups do change from department to department—they’re not all the same. Anyway, in this participant’s case, the underlying cost to all the funds in the account added up to 0.37% of the account. Add that to the 0.65% for the ProAccount fee, and this person is paying 1.02% per year in fees. More on that in a minute.

OK, last thing I’m going to point out before I show you what I think is a better way. And that’s this: In the disclosure Form ADV Part 2A, which Nationwide has to file with the SEC—and available as a link below—Nationwide discloses that it incentivizes its reps to offer the program.

In other words, when you sign up, the rep on your account gets paid something extra. I’m not sure I’d agree that’s the most ethical thing they could be doing, but just in case you were wondering why your Nationwide rep is so gung ho on the idea of you signing up—well, that probably has something to do with it.

So, is there something better you could be doing? I think there is. In the fund lineup in every plan are these things called “target date funds.” In the Miami Dade plan I mentioned earlier, the target date fund is called the Vanguard Target Date Retirement 2035 fund, or the Target Date Retirement 2040 or 2045, or so on.

What these funds do is offer you a highly diversified fund of stocks and bonds, domestic and international, all in a mix appropriate for someone retiring in 2035 or 2040 or whatever. Basically, the same thing the ProAccount does.

But get this. In the Miami Dade plan, the target date fund costs only 0.08%. That’s it. No 0.65% ProAccount fee and a mutual fund administrative fee on top of that. Bottom line is it’s about 90% cheaper than the ProAccount and has the same objective. Except that it leaves nearly 1% more (actually, 0.94% more) in your account to grow and compound. That makes a difference.

I’d have a hard time believing the ProAccount is going to do that much better than the comparable target date retirement fund—or any better, for that matter.

My opinion is that, like a lot of things that we’re sold these days, it’s mostly a lot of razzle-dazzle and a way that Nationwide can add fees to make their product more profitable for them. How much more profitable? In the Form ADV Part 2A, Nationwide discloses that as of the end of 2023, they had over $14 billion in ProAccounts. Do the math. At just 0.65%, that’s over $91 million in ProAccount fees alone. I think that money is better off in your account than theirs.

There’s nothing to suggest that if you took the same level of risk in a target date fund as the ProAccount is taking, you won’t do better, simply because you’ll be paying a lot less in fees. It’s really that simple.

Keep it. Be smart and avoid the ProAccount. You can do better.

Hey, thanks for watching. If you have any questions on any of this or would like to talk further about it, give us a call. In the meantime, stay safe, and thanks for what you do for the rest of us.

The information referred to in the video about the Nationwide ProAccount plan, including the Form ADV Part 2A, can be found here: https://www.nationwide.com/proaccountadv/.