Administration April 1, 2013

BDC Stocks Offer High Dividends and Stability

April 1, 2013 (PLANSPONSOR.com) – Institutional investors and registered investment advisers (RIAs) are increasingly using business development company (BDC) stocks, a source contends.
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BDC stocks pay a 10% dividend on average and offer easy liquidity, making them a good vehicle to complement a fixed-income stream and remain diversified, Dean Choksi, vice president of finance at Fifth Street Finance—a BDC and alternative investment company—told PLANSPONSOR. “We’ve definitely seen an increased interest from institutional investors and RIAs,” Choksi said, adding that pension funds invest in BDCs because of their high dividend and stability.

Due to current low-interest rates, fixed income is not as high-yielding as it once was.  However, if interest rates rise, Baby Boomers and investors with short time horizons who are invested in fixed income are at risk of significant principal decay and are looking to supplement their income through high-dividend paying stocks.

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BDCs typically have dozens of companies within their portfolio (e.g., health care, education, technology, etc.). “So it’s generally businesses that have a defensible niche,” Choksi said.  About one-quarter of Fifth Street’s portfolio is in health care, and about 16% is in technology, he said.

To be a BDC, a company must pass 90% of their revenue to shareholders, which makes it a great income stream, Choksi added. He estimates there are about 35 to 40 publicly traded BDCs. 

Market Vectors ETF Trust recently launched the Market Vectors BDC Income exchange-traded fund (ETF) (NYSE Arca: BIZD), designed to provide pure-play exposure to BDCs (see “ETF Focuses on Business Development Companies”).  “Investing in BDCs provides exposure to private companies that many investors could not otherwise access, allowing for potential growth and yield generation,” Brandon Rakszawski, product manager for Market Vectors ETFs, said when the product launched. 

Benefits April 1, 2013

State DC Plan Sponsors Offer Financial Education

April 1, 2013 (PLANSPONSOR.com) - A survey found all public defined contribution (DC) and hybrid plans offered some sort of financial education and/or advice to employees.
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According to a working paper issued by the National Bureau of Economic Research (NBER), the most popular option for financial education or advice is one-on-one telephone consultations. The next most popular options, available to over 90% of the surveyed respondents include group seminars, periodic newsletters, live webinars, and new hire information packets.   

Additionally, approximately three-quarters of active participants in these plans have access to third-party online financial advice. One-on-one in person consultations and internet options (financial education web component and online videos) are offered to little more than half of actives. While more than half the plans use e-mails, it only equates to 19% of the active member population, indicating smaller plans are using this option more than larger plans, the paper’s authors said. The least popular approach to financial education and advice among state DC and hybrid plans is social media.  

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The survey found public plans are very involved in the development of their financial education programs. The majority of the programs are either developed by the plan in-house or in conjunction with a third party. In most cases, with the understandable exception of third-party online advice, less than 35% of financial education is completely outsourced to a third party for development.

A few plans had several different providers creating their financial education programs. For example, one firm designed their workshops, another firm handled communications and a third firm provided the advice.   

According to the survey results, most types of educational offerings cover both plan specific and general financial knowledge topics. In most cases, the most popular plan-specific topic is a plan overview, with plan investment options and plan distribution options competing for second. Third-party online advice is the only educational program that is more likely to cover plan investment options and distribution options than provide a plan overview.   

Regarding general financial topics, retirement planning dominates all other topics in all but one case, with diversification, overview of assets and basic investment principles generally ranking second or third. Other topics that are covered by some plans but are not as popular include debt management, inflation, compound interest, and budgeting.   

The survey respondents list their main goals for financial education as improving overall retirement outcomes (95%), highlighting the importance of retirement savings (95%) and helping members make better investment decisions (90%).

Roughly 80% of DC and hybrid plans surveyed measure the success of their financial education programs. Among those that do, about 90% use surveys and attendance records to assess performance. In terms of following actual member decisions made, about 40% of plans track default rates, and 35% follow actual participant behavior. Only two plans have employed an experimental field study to test for statistically significant changes in behaviors.  

As more and more public pension systems are shifting away from a defined-benefit-only framework, the complexity of the financial decisions facing public employees is increasing. This raises some concerns about the financial literacy of participants and their ability to make informed decisions. Paper authors Julie Agnew and Joshua Hurwitz noted that surveys addressing financial education in private plans are available, but little is known about what types of education and advice are offered in public plans. The paper presents results from the first National Public Pension Plan Financial Education Survey.  

The paper also discusses why financial literacy matters; documents the lack of financial literacy in the U.S. and how it may affect financial decisions; gives a short overview of the literature related to the effectiveness of financial education and advice associated with retirement plans; and provides details behind the recent public sector shift away from defined-benefit (DB)-only retirement systems.  

Information about how to obtain a copy of the paper is at http://papers.nber.org/papers/w18907.

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