Your principal is right on. There is little evidence the retention is a good thing for kids. Especially if this child has ADHD and an IEP the data is flat out the opposite that this is not an effective strategy for progress. It is easier to watch maybe, and it feels less intimidating, but it is not going to help him in the long run.
At the heart of the matter is this: he is showing needs in reading already. The window for the most effective reading intervention will close between the age of 8 and 9, and intervention beyond that point will be slow, difficult, and much less effective than if done earlier. Intervention is done based on grade, not age. If you hold him back, you delay what is expected of him and what is considered to be in need of intervention. By promoting him on time, he will qualify for reading intervention from the begining of his 1st grade year (at the very best case, and it could take months or years to get even if he is at age-grade level) The kind of intervention program most schools offer may be called dyslexia intervention, or alphabet phonics, or an orton gillingham reading intervention, but these are his best bet, and you should ask for it as soon as possible because all kids learn to read with these methods, even kids with ADHD (he does not need to have a dyslexia or LD diagnosis-if reading is an issue, and it sounds to me like it will be-his educational needs are what qualify him.) You certainly do not want to delay this intervention for a year for him to be behind his grade peers before they offer this service. The data on this is unarguable. Kids who need reading intervention and are held back loose one full year of reading intervention and are many, many times more likely to experience full scale reading failure than their peers who receive timley intervention.
The other reason to not retain is that your nephew is already at risk of many things that you will not like, because of his ADHD diagnosis. Dropping out of school, drug use, illiteracy, and suicide are a few that are most notable. If he is also older than his grade level peers in high school, he is at even higher risk for dropping out, using drugs and you can add contact with the juvinile justice system to his list of possiblities too. It is not a rosey picture later. This data is absolutley clear.
Espeically since this child has an IEP, push for intervention to bring him to grade level and use the normed references that will be age appropriate. The difference that you see between his scores and his age peer scores will not improve with another year of inappropriate services that do not address critical skills that he will be failing to meet by over a year, not just failing to meet with his peers. He needs educational services that address his issues, no just more of the same that did not already work.
M.
**Read about retention at www.wrightslaw.com. This will be a great site for you as well as you navigate the special education system