Thursday, September 30, 2010

Annuities could get boost from small business legislation

Employee Benefit News
By Donna Mitchell
September 29, 2010
The battered annuity industry seemed to have found a powerful ally in President Obama’s administration, when the Middle Class Task Force issued a report in January saying the executive branch would work to promote the availability of annuities and other forms of guaranteed income.
United States President Barack Obama signs int...Image via WikipediaPart of that promise was fulfilled Monday, after President Obama signed the Small Business Jobs Act into law.
The legislation includes a provision that allows holders of non-qualified annuities to carve out some of the funds from a deferred annuity and buy an immediate annuity contract with those proceeds.
The original deferred annuity will continue to grow and accumulate tax-deferred income. Designated as an offset, it is designed to promote retirement preparedness. …
Small employers
Because of their size, some small business owners are not able to directly offer qualified retirement savings plans. For employees of these companies who happen to own a deferred annuity contract, the new law gives them greater flexibility to save outside of the workplace toward a secure retirement, according to Cathy Weatherford, president and chief executive officer of the Insured Retirement Institute, based in the nation’s capital.
Currently, if an individual wants to pull a portion of money out of his or her single guaranteed annuity and buy a separate contract, that investor would have to cancel the original contract and buy two separate annuities. They would incur a surrender charge beginning at 5% of the invested amount, at least, and ranging to 7% and up, Weatherford explains.
"This is a giant step forward that will allow Americans to have annuities … as they build out their retirement savings strategies going forward," Weatherford says. "It will save money on fees for exchanges or those types of things. It is a way for people to get one more option to continue to grow next egg at time when might need guaranteed lifetime income."
There could be more to come from the current administration, in terms of supporting the annuity industry. In February, the Departments of Labor and Treasury requested information for how to encourage 401(k) plans to offer annuities to their participants, which has gotten many responses from insurance companies and trade groups.

Donna Mitchell is a senior editor at Financial Planning, a SourceMedia publication.
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Wednesday, September 29, 2010

Pay and Benefits not the Only Drivers of Employee Loyalty

September 28, 2010 ( - A recent global poll conducted by Monster shows that good pay and benefits is the top reason cited for securing employee loyalty (27%).
However, the survey also showed that having a solid team (21%) and being recognized for good work (21%) were also highly rated by workers polled. In addition, according to a press release, respondents cited challenging/interesting work (20%) and opportunities for advancement (11%).
Globally, having a great boss and co-workers, challenging/interesting work and gaining recognition all recorded results at 20% or above, demonstrating that, for many workers, there is more to their loyalty than financial rewards, Monster said.
Pay and benefits was the biggest factor driving loyalty for workers in North America, where 32% of respondents reported so, as well as workers in Hungary (38%), the Gulf (38%), Singapore (31%), Canada (30%) and the UK (24%). Respondents in India (31%), Italy (27%) and Ireland (24%) rated gaining recognition as the foremost reason for them being loyal to their employers.
Challenging or interesting work is the most important factor driving loyalty in Finland (35%) as well as for respondents in both France and the Netherlands (20%).
"It's not surprising that pay and benefits top the list, but it is very important that an employer recognizes they need to provide a good experience in the workplace overall," said Jeffrey Quinn, senior director, Monster Intelligence, in the press release.
Rebecca Moore
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A Better Choosing Experience

When consumers are overwhelmed with options, marketers should give them what they really want: ways of shopping that lower the cognitive demands of choosing.

strategy+business magazine

Illustrations by Andreas Samuelsson
Baskin-Robbins' Australia current logoImage via WikipediaWhen Baskin-Robbins, now the largest ice cream chain in the world, opened in 1953, its line of 31 flavors — one for every day of the month — was a novelty. … Cofounder Irvine Robbins said, “We sell fun, not just ice cream,” and part of the fun for customers was the experience of seeing and tasting so many new flavors. The company continues to emphasize variety; …
Today it seems obvious to offer consumers more choice — but the experience is no longer a novelty, or nearly as much fun. Whereas in 1949 the average grocery store stocked 3,700 products, the average supermarket today has 45,000 products, and the typical Walmart has 100,000 products. Online are even more options, … Starbucks, … recently launched the However-You-Want-It Frappuccino, with “thousands of ways to customize your blended beverage.” Cold Stone Creamery claims that its menu of mix-ins provides more than 11.5 million ways to “customize your ice cream treat.” Long gone are the days when an array of 31 flavors knocked our socks off.
Consumers have grown accustomed to having a lot of choice, and many people still express a strong desire for having more options. But that doesn’t make it a good idea. There are neurological limits on humans’ ability to process information, and the task of having to choose is often experienced as suffering, not pleasure.
That is why, rather than helping consumers better satisfy their preferences, the explosion of choice has made it more difficult overall for people to identify what they want and how to get it. … [You] can outthink and outperform your competitors by turning the process of choosing into an experience that is more positive and less mind-numbing for your customers. …
The goal of a new approach to choice should not be to manipulate consumers into making choices that aren’t right for them, but rather to collaborate in a way that benefits both of you. … To accomplish this, here are four actions you can take:
  1. Cut the number of options.
  2. Create confidence with expert or personalized recommendations.
  3. Categorize your offerings so that consumers better understand their options.
  4. Condition consumers by gradually introducing them to more-complex choices.
Offered together, these actions can distinguish your company. … [You’ll] be one of those rare companies whose offerings rise to the top by raising customer spirits.
The Multiple-choice Problem
supermarket 70774Image by s.alt via Flickr…[In] the mid-1990s, … Sheena Iyengar conducted a study of shopper selection at … Draeger’s, a specialty grocery store renowned for its huge selection of produce, packaged foods, and wine. Iyengar realized that although she greatly enjoyed visiting the store, she often walked out empty-handed, unable to settle on just one bottle of mustard or olive oil …
… Iyengar and her collaborator, Mark Lepper, set up a jam-tasting booth near the entrance of the store. Every few hours, the booth switched between offering an assortment of 24 jams and an assortment of six. The researchers wanted to know which assortment would attract more people and which one would lead to higher sales. They observed the shoppers as they moved from the booth to the jam aisle, which boasted 348 varieties.
As might be expected, 60 percent of the incoming shoppers stopped when 24 jams were displayed, but only 40 percent stopped when six jams were displayed. Clearly, people found the larger assortment more attractive. However, when these same shoppers went to the jam aisle to pick up a jar, the shoppers who had seen only six jams had a much easier time deciding what to purchase.

By observing the shoppers and eavesdropping on their conversations, the researchers discovered that the small assortment helped people narrow down their choices, whereas the large assortment left them confused and unsure of their own preferences. Of those who stopped by the large assortment, only 3 percent ended up buying a jar of jam — far fewer than the 30 percent who bought jam after stopping by the small assortment. … Iyengar and Lepper calculated that people were more than six times as likely to buy jam if they saw the small display.
… People like the idea of choice. … In short, they believe that having more choice gives them more power and satisfaction.
But they overestimate their own capacity for managing these choices. Psychological studies have consistently shown that it’s very difficult to compare and contrast the attributes of more than about seven different things. When faced with the cognitive demands of choosing, people often become overwhelmed and frustrated. As a result, they may forgo the choice altogether, reach for the most familiar option, or make a decision that ultimately leaves them far less satisfied than they had expected to be.
We see this frustrated response to “choice overload” even when the decision has serious consequences. …[At] the request of Steve Utkus, the director of the Center for Retirement Research at the Vanguard Group, Iyengar and her collaborators, Wei Jiang and Gur Huberman, tried to determine why so few of the 900,000 employees covered by Vanguard were participating in their … 401(k) plans. Analysis of the data revealed that participation fell significantly as the average number of funds in a plan rose. By controlling for individual-level variables such as age and income, as well as plan-level variables such as the size of the company and the extent of employer matching contributions, Iyengar and her collaborators showed that the decline in average participation rates was due to an increase in choice. When plans offered only two funds, 75 percent of the relevant employees participated; when plans offered 59 funds, the percentage of participants fell to 61 percent. …
Moreover, Iyengar and Emir Kamenica discovered that the employees who participated made worse investment decisions, on average, when they chose from plans with more options. For every 10 additional funds offered in a plan, employees allocated 3.28 percent less of their contributions to equity funds (as opposed to bond or money market funds), and they were also more likely to avoid allocating any of their contributions to equities at all. … Even employees in their 20s, who should have been allocating 80 to 90 percent of their contributions to equities (based on the accepted wisdom of financial advisors), became more likely to entirely avoid equities as the number of options rose, undermining their long-term financial well-being.
The deleterious effects of too much choice have been observed in other situations as varied as buying chocolate, applying for jobs, and making healthcare decisions. … People keep expressing a desire for more choices, and businesses keep expanding product and service options in order to fulfill this desire — but it often does more harm than good.
Don’t marketers have to give consumers what they want? Yes and no. … When consumers say they want more choice, more often than not, they actually want a better choosing experience. They want to feel confident of their preferences and competent during the choosing process; they want to trust and enjoy their choices, not question them. … The following four means will help you meet that challenge.
Head & Shoulders shampooImage via Wikipedia1. Cut their alternatives. … Most companies avoid reducing the number of products they offer because they’re afraid of losing shelf space to their competitors. But careful trimming can lower costs, increase sales, and improve the choosing experience for consumers. In the mid-1990s, when Procter & Gamble Company winnowed its 26 varieties of Head & Shoulders anti-dandruff shampoo down to 15, … sales jumped by 10 percent. In a similar case, the Golden Cat Corporation got rid of its 10 worst-selling offerings in the small-bag cat litter category. This led to a 12 percent increase in sales and slashed distribution costs by half; the end result was an 87 percent profit hike. Another example comes from a 2001 study that tracked an online grocer that had made substantial cuts in the number of products it offered, … Not only did sales rise an average of 11 percent across 42 categories, but 75 percent of its customer households increased their overall expenditures.
… Potential consumers should be able to zero in on a product’s defining characteristics and explain why it is (or is not) appealing to them. If people respond vaguely or inattentively, that’s a signal that the choices you offer are not distinct enough and should be consolidated.
2. Create confidence through recommendations. Reducing options works well when the variations between products are relatively small. But for highly differentiated goods — books, prerecorded music and video, clothes, and many housewares — you can’t get away with offering a small selection. … Instead, you have to offer a wide variety while helping consumers navigate the complexity so they still have a positive choosing experience. …
Through study and practice, experts in any field learn to simplify, categorize, and prioritize information, and to recognize patterns. This allows them to create order out of seeming chaos. …
In high-choice conditions, the ideal consumer is the most expert consumer. That doesn’t mean someone with in-depth expertise in any one type of product. … However, novice consumers can become expert general consumers by learning to rank and structure their choice sets the way that experts do.
Marketers can thus help novices make more-educated guesses and create confidence in their choices by giving them easy access to expert reviews and recommendations. … Even non-expert advice can prove useful when there is consensus among a large number of reviewers or when the consumer trusts the source. This is one reason for the popularity of shopping websites with user reviews …
Another way to give consumers access to recommendations, … is to set up automated systems that generate suggestions based on consumers’ expressed preferences. These systems, …are software programs that guide people by analyzing their prior purchases or their answers to survey questions. If consumers are willing to invest a little time teaching a well-designed system about their preferences, then the system can serve as a personalized expert for them. People don’t usually trust programs as much as they trust other people, but trust in well-performing electronic agents tends to develop over time.
Image representing Pandora Media as depicted i...Image via CrunchBaseFor example, the Internet radio service Pandora has acquired 50 million users who tune in for an average of 12 hours a month, even though (or perhaps because) they cannot directly choose what they’ll hear. Pandora’s “mission” is to “play only music you’ll love,” and it accomplishes this by combining human expertise with an automated system. First, trained analysts determine the musical attributes of every song in the database. …Then, when users tell the system what music they like, it searches for other music with similar attributes. As they listen to their personalized music streams, users can let the system know how well it matched their preferences. Eventually, the system comes to “know” the users well enough that they no longer have to provide feedback. They can just sit back and enjoy.
3. Categorize their options. You can also help novices by teaching them to emulate expert judgment. For an expert, there is no completely unique product or service; rather, each offering is a distinctive combination of attributes that the expert has seen before. Thus, where the novice sees 100 different items, the expert sees maybe seven or eight relevant qualities interacting in novel ways, with one or two important features that immediately stand out. The trick is to get the novice to see things as the expert sees them.
The easiest way to do this is to categorize. For example, Best Cellars, Wine Enthusiast’s Retailer of the Year in 2009, makes the choosing process a breeze for its customers by consulting with oenophiles in advance. It draws on their advice to limit its variety to 100 high-quality, reasonably priced wines. Since 100 wines could still be an overwhelming number for novices, Best Cellars divides the wines into eight simple categories, such as “fizzy,” “juicy,” and “sweet.” The novice has to deal with only eight units of information now, which can be managed fairly easily. Once the novice has chosen a category, he or she can choose a wine within that category by reading the detailed labels that accompany all the bottles.
… By pre-sorting the wines into categories, the retailer helps novices look at the world through expert lenses. Best Cellars cofounder Joshua Wesson says, “We all want simplicity when it comes to these types of decisions…. We try to make wine shopping as much fun as wine drinking.” Note that this is the flip side of what Baskin-Robbins did in its heyday. Both retailers have thrived by creating a better choosing experience. Back then, this meant giving customers more choice; now, it means giving them less.
Des magazines de mode en vente à Copenhague.Image via WikipediaTo simplify the choice process, limit your categories to no more than 20, with 10 or fewer options in each. When you hold to these limits, consumers are likely to feel empowered by the number of choices, and are unlikely to miss any offerings that weren’t included. Iyengar and her collaborators, Cassie Mogilner and Tamar Rudnick, discovered this when studying the magazine aisles in several Wegmans supermarkets. The number of magazines available at various branches ranged from 331 to 664, but this number had no effect on buyer satisfaction. What mattered was the number of categories, … that each display provided. Arranging the magazines under a wider range of subheadings created the perception that the store offered more choice, even when the number of magazine titles was comparatively small. Customers in these stores also reported greater enjoyment of their overall shopping experience.
…[The] categories established by a marketer or retailer provide a framework for making sense of a large assortment, thus keeping consumers from being discouraged by the daunting task of choosing. …[These] categories … also provide a general overview of the field, which catalyzes consumers’ understanding of it and the development of their preferences within it.
4. Condition them for complexity. For certain kinds of decisions, you can set up consumers for success by encouraging them to learn from, and build upon, their own previous choices. This is especially valuable if your product is customizable.
For example, Iyengar and her collaborators, Jonathan Levav, Mark Heitmann, and Andreas Herrmann, conducted a study with a major German car manufacturer that allows customers to design their new cars from a long list of options, choosing everything from the engine to the rearview mirror. They presented the first eight design choices in different sequences to different groups of car buyers. One group had to choose  [design elements from categories that went from high choice to low choice]. A second group of buyers encountered the same choices in reverse order, starting with the design elements that offered the fewest options and ending with the ones that offered the most. Although both groups eventually saw 144 total options across eight categories, the buyers who moved from high choice to low choice had a much harder time. They began by carefully considering every option, but they soon grew tired and settled for the default. In the end, they wound up less satisfied with their cars than the buyers who had progressed from low choice to high choice.
This research shows that people can handle a large number of options, if they start off in the shallows and then slowly move toward the deep, all the while building skill and nerve. Beginning with fewer options not only warms up consumers, it helps them better figure out their own preferences, which in turn enhances their choosing experience. Over time, practicing this choosing technique will condition consumers to cope with increasing complexity.
An Open Invitation
Each of these forms of customer engagement can be technologically enabled, …. But the heart of this method lies in better design of the shopping experience, fueled by better awareness of human capabilities. When you take this approach, … your goal is to invite consumers to enter into a collaborative, mutually beneficial relationship with you.
From the outset, your design shows them that you understand how they think and respect their desire for both control and simplicity. The message is clear: In the short run, you are helping them navigate a bewildering and even debilitating world of options. In the long run, you are inviting them to choose you.

Author ProfileS:

  • Sheena Iyengar is the S.T. Lee Professor of Business at Columbia University and a recipient of the Presidential Early Career Award. She is the author of The Art of Choosing (Twelve, 2010), from which this article is adapted.
  • Kanika Agrawal is a research assistant at the Columbia Business School and a graduate of Columbia’s MFA program in writing.
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Tuesday, September 28, 2010

A Cup of Joe is Good Medicine

A photo of a cup of coffee.Image via Wikipedia

September 27, 2010 ( – There’s nothing like a good cup of Joe to get you going – particularly if you are a nurse or a doctor.

Image via CrunchBaseImage representing Careerbuilder as depicted i...
Dunkin Donuts logoImage via Wikipedia

A new survey by retailer Dunkin’ Donuts and CareerBuilder finds nurses and doctors topped the list of professions in which workers said they got the most done after downing a cup of coffee.
A CareerBuilder news release said after nurses and doctors, the biggest coffee-drinkers were found among:
3) Hotel workers,
4) Designers/Architects,
5) Financial/Insurance sales representatives,
6) Food preparers,
7) Engineers,
8) Teachers,
9) Marketing/Public Relations professionals,
10) Scientists,
11) Machine operators, and 
12) Government workers.
In general, 32% of respondents said they need a jolt of caffeine to make it through the day, while 43% said their production lagged when they were coffee free.
Geographically, workers in the Northeast U.S. stated they are the most dependent on coffee, with 48% of people claiming they are less productive without coffee, compared to the South at 45%, West at 44% and Midwest at 34%. Meanwhile, younger workers are more dependent on a coffee fix. Forty percent of respondents ages 18 to 24 admit they can’t concentrate as well without coffee, and 43% of those ages 18 to 34 stated they have lower energy if they don’t drink coffee.
Thirty-seven percent of American workers drink two or more cups of coffee during their workday, and 75% of American workers who buy coffee during the workday only travel a quarter mile or less for their daily brew.
The survey was conducted online within the U.S. by Harris Interactive on behalf of CareerBuilder among 3,661 U.S. workers (employed full-time; not self-employed; both government and non-government) ages 18 and over between August 17 and September 2, 2010.
Fred Schneyer

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Brinton Eaton Warns of Big Tax Hikes if Congress Doesn’t Act

Non-spouse beneficiaries could experience rates as high as 55%

Advisor One
September 27, 2010 | By Michael S. Fischer

The Bush income and estate tax cuts of 2001 are set to expire in three months, and Robert DiQuollo, president of the boutique advisory firm Brinton Eaton, is more than a little concerned about congressional inaction in the run-up to November midterm elections.
“If the Bush tax cuts of 2001 are not extended, we will witness one of the largest tax increases in history,” DiQuollo said in a commentary released by Brinton Eaton on Friday.
Nine years ago, Congress passed several income and estate tax reductions through a “reconciliation” process that resulted in their being sunsetted after 2010.The commentary noted that, absent congressional action, marginal income tax rates for the top fifth and top income brackets would increase to 36% and 39.6%, respectively, from the current rates of 33% and 35%. Net capital gains rates for these two brackets would go up to 20% from 15%.
Plot of top bracket from U.S. Federal Marginal...Image via Wikipedia

The biggest change, however, would come in the qualified dividend area, which would increase from 15% to a maximum of 39.6% if Congress did not extend the cuts, according to the commentary. Moreover, tax rates for 2013 when the new health care laws are effective would impose an additional 3.8% tax on individual taxpayers whose modified adjusted gross income exceeds $200,000, or $250,000 for married couples filing joint returns.
The estate tax in 2011, and going forward, would also be significantly more onerous if Congress did not act, the commentary said. In 2009, an individual could leave up to $3.5 million to a non-spouse beneficiary without incurring a federal estate tax.
Logos and uniforms of the New York YankeesImage via Wikipedia“For the current year, 2010, there is no federal estate tax,” DiQuollo said in the commentary. “You may recall hearing that the heirs of George Steinbrenner, the late owner of the New York Yankees who died in July, saved almost $500 million in federal estate taxes, on a $1 billion estate. This pales in comparison to Dan Duncan, owner of a natural gas processing plants in Texas, whose heirs will inherit over $10 billion with no estate tax.”
The commentary concluded that without congressional action, the federal estate tax will be reborn on January 1, 2011, and will tax all inheritances to non-spouse beneficiaries in excess of only $1 million dollars, with progressive rates going as high as 55%. DiQuollo pointed out that if billionaire Dan Duncan had died in 2011 rather than 2010, “his estate would have paid up to $5.5 billion to Uncle Sam (assuming the estate was left to his children) versus the actual amount of ‘zero.’ ”
About the Author
Michael S. Fischer
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Thursday, September 23, 2010

Those Added Pounds can cost Big Bucks

Silhouettes and waist circumferences represent...Image via Wikipedia

September 22, 2010 (PLANSPONSOR 2009 Ultimate Buyer's Guide) – Carrying the extra pounds is not only a major health hazard, but also can represent a big hit in the pocketbook, according to a new study.

A bust of George Washington on the campus of G...Image via WikipediaAn Associated Press news report said George Washington University researchers started with the cost of obesity-related medical care and then tacked on things like employee sick days, lost productivity, even the need for extra gasoline.
The result for the annual cost of being obese: $4,879 for a woman and $2,646 for a man. That's far more than the cost of being merely overweight — $524 for women and $432 for men,
The report also averaged in the economic value of lost life from obesity-related premature deaths, which brought women's annual obesity costs up to $8,365, and men's to $6,518.
Health policy professor and study co-author Christine Ferguson said the difference between the genders is due to the fact that larger women earn less than skinnier women, while wages don't differ when men pack on the pounds.  Researchers had expected everybody's wages to suffer with obesity, but "this indicates you're not that disadvantaged as a guy, from a wage perspective," Ferguson told the Associated Press.
Finally, when it comes to obesity costs, the research found that nearly 1 billion additional gallons of gasoline have been used every year because of increases in car passengers' weight since 1960.
Researchers analyzed previously published studies to come up with a total obesity-related cost total.
The research report is available here.
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Wednesday, September 22, 2010

Performance Fees Enrich Managers but Hurt Investors says Coburn Barrett

21 September 2010 ( Performance fees encourage fund managers to take maximum short-term risk rather than thinking about higher returns in the long run, according to Coburn Barrett.

"Flat fees are the best way to ensure alignment of manager and investor interests. Performance fees do not mean higher returns; instead they encourage fund managers to take maximum short-term risk. When a bet is won, they are very well paid, but when the bet is lost, it is the investor alone who carries the loss. We saw this quite clearly and painfully in 2008", said Thomas Wehlen, Founder and Senior Fund Manager at Coburn Barrett.
"Returns absolutely matter to investors; but they need to be aware, that performance is not always the primary concern of intermediaries", says Wehlen. …
Seriously large returns need two things, maintains Coburn Barrett: they need to happen over a long period of time and the volatility has to be low enough that an investor can allocate a substantial amount to it. The average life span of a hedge fund is roughly three years, and for mutual funds it is not much longer.
Coburn Barrett believes that as important as absolute returns, is the volatility, or risk, taken to get there.
Thomas Wehlen continued: "Many funds change their risk exposure significantly over time. This burdens investors with unwanted exposure, and deprives them of opportunities for return. Over the long-term, being out of the market is very often more expensive than being in, and losing".
Katherine Blackler
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Tuesday, September 21, 2010

Protection from the Storm
Thinking about investment-management outsourcing? Here are seven of the biggest myths and realities
“If it is raining, you are looking for the best umbrella,” says Joshua Dietch, Managing Director at Waltham, Massachusetts-based Chatham Partners, a market research and consulting company. Some employers—who sponsor underfunded defined benefit (DB) plans that need better risk management or defined contribution (DC) plans that need less-costly, more-customized investment options, for example—have looked to the expertise of investment-management outsourcers as that protection from the current storm.
However, this complex field is ripe for confusion among employers considering it. Sources talked about several of the most common investment-outsourcing myths:
1. It is just for mid-size sponsors. “The real sweet spot for outsourcing is mid-size companies,” says Seth Masters, CIO of AllianceBernstein Blend Strategies and Defined Contribution, and most of the first wave of deals did, in fact, happen with these plans. These employers often do not have the in-house resources to do all the work effectively, but have enough in assets to make deals scalable for an outsourcer.
Russell Investments headquarters in Tacoma, WA...Image via WikipediaWhile the mid-size market remains active, “we also see much more of a trend at the larger end,” says Joseph Gelly, Russell Investments Investment Outsourcing Practice Leader. “It is less around ‘I do not have buying power’ or ‘I do not have the resources or the technical competence’ and more around ‘I need to focus on running my company,’” he says, adding that many of those larger employers have frozen DB plans and want to devote their time and resources to core parts of their business rather than legacy benefits.
2. It is just about managing managers. Many sponsors traditionally see outsourcing in terms of investment oversight, says Clint Cary, Senior Vice President at Aon Investment Consulting. “It is not just managing assets; it is managing the funded status,” he says. Sponsors of active DB plans “are migrating to a risk-management approach, where they are trying to improve the funded status of the plan and de-risking the plan as they get better funded,” he says, “and they do not have the risk managers internally.”…
Northern Trust headquarters in Chicago, Illinois.Image via Wikipedia3. Only defined benefit plans get outsourced. These plans have used outsourcing the most, but defined contribution (DC) sponsors increasingly consider it, says Jennifer Tretheway, a Senior Vice President and Managing Director at Northern Trust Global Advisors. “The most common thing we see from DC plans is an interest in having some type of oversight done, anything from overseeing the mutual fund options on a recordkeeper’s platform to something more proactive, in terms of having discretion on which investment-management firms to utilize,” she says.
DC plans may need outsourcers’ expertise even more than DB plans, Masters says. “Historically, DC plans did a kind of outsourcing by hiring recordkeepers that provided a bunch of options, mostly in mutual fund form and often, frankly, at a fairly high cost,” he says. However, DC plans have become most Americans’ primary retirement-savings vehicle, leading employers to want to limit the cost to participants as much as reasonably possible.
“The single biggest thing that people will get help with is customizing target-date funds,” Masters predicts. “In the next 10 years, virtually all growth in DC assets will be in target-date assets. So, as that unfolds, it becomes increasingly important for plan sponsors to get the target-date decision right.” Designing and implementing a customized target-date structure so that it comes as close to the cost of a DB plan as possible “is a fairly specialized task,” he says, and many employers lack that in-house expertise.
4. It costs a lot, or saves a lot. “Another primary misconception is that outsourcing is more expensive than doing it in-house,” Tretheway says. “The majority of our clients do recognize some savings, in the form of hard-dollar expenses for investment management, custody, and performance measurement. On average, clients might recognize a savings of around 10%.”…
“[Sponsors] do not go in thinking the overall fees are lower; they go in thinking they will get a more comprehensive service set,” Cary says. “They see it as a cost-neutral solution. Cost is not a main driver, and is also not a hindrance.”
Remember that the cost of administration for a DB plan pales compared with the cost of funding the plan, Dietch says. The argument for outsourcing a pension plan is “you reduce your cost of funding if you generate higher returns and less volatility, and reduce tracking error,” he explains.
5. Sponsors can offload their fiduciary responsibility. Dietch wonders if most employers realize that they retain significant fiduciary obligations if they outsource. Even if they think they can transfer that responsibility legally, Masters says, “I think you cannot morally: The reputational risks are too great.”
Yet, the desire to forgo as much fiduciary responsibility as possible “is a big motivator” to outsource, Dietch says. “It is certainly being aggressively marketed.” However, an ERISA plan sponsor remains a fiduciary, he adds, and has to operate with that standard in selecting and monitoring an outsourcer.
“That fiduciary role does not go away,” Gelly says. “The responsibility shifts from day-to-day to more strategic. Their involvement is extremely critical, but it is more at the strategic level,” such as approving the investment policy. The employer also still needs to evaluate the investment outsourcer’s performance regularly, Tretheway says, and most clients look at quarterly committee meetings as a good time to cover that.
6. It means giving up all control. “One thing I hear a lot is that people feel like, ‘Oh, I am giving up control,’” Gelly says of employers thinking about outsourcing. In reality, Tretheway says, clients’ ongoing involvement level really ranges. For instance, some clients delegate to Northern Trust the authority to hire and fire investment managers but, in other cases, it does not have complete discretion. For those with less day-to-day involvement, she believes, they ultimately have more control because they can track progress more closely to meet their goals.
There is no one right answer on how involved in day-to-day workings a sponsor should stay after outsourcing, Masters says. …
7. Outsourcers only sell pre-packaged solutions. “There is a little bit of a myth out there around, ‘This is a black box,’” Gelly says. “Unfortunately, some people think that everybody is treated the same.” Sometimes yes and sometimes no. For instance, Gelly says that Russell highly customizes the weighting among plan clients’ asset classes based on factors such as a plan’s liabilities.
Outsourcing has a lot of different permutations in the marketplace, Dietch says, but to do this business profitably, outsourcers have to create something scalable. As for customizing to specific clients, he says, “a lot of it comes down to what the contractual terms say.” Some outsourcing providers take a more-standard approach: “They have one fund, and everybody goes into that fund,” Tretheway says, “but all of our clients have a unique asset allocation, and a unique investment policy statement. We really have a hard time believing that any two organizations have identical needs.”
Judy Ward
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Monday, September 20, 2010

The Pros and Cons of 401(k) Annuities

Retirement Income Journal
By Kerry Pechter Thu, Sep 16, 2010

One witness at the DoL/Treasury hearings this week asserted that mandatory annuitization of DC assets at retirement is needed. The government, as well as sponsors and plan providers, have largely ruled that out.
The prominence of the witnesses testified to the significance of the DoL/Treasury Department hearings this week on so-called "401k annuities" and other tools that can help plan participants turn their savings into income--either while they save, when they reach retirement, or in retirement. …
Trade, labor, and consumer advocacy groups also contributed their thoughts. The AFL-CIO, the Investment Company Institute, the Profit-Sharing and 401(k) Council of America, the American Council of Life Insurers, the American Society of Pension Professionals and Actuaries and the Spark Institute all gave testimony. Other groups and firms can contribute statements via e-mail over the next month.
Some witnesses praised in-plan annuities, while others, like Steve Utkus of Vanguard, tried to bury them. To be sure, there are plenty of good reasons for putting income options in plans, either as savings vehicles (deferred annuities) or exit options (immediate annuities, payout funds).
Big plan sponsors have economies of scale and bargaining power that lower the costs of products, administration, and education. Plan sponsors are also in a unique position to set up a program that applies the employer match to the purchase of future income… . Like contributions to a defined benefit plan, that kind of program would leverage the time value of money and mitigate the interest rate risk and timing risk associated with the lump sum purchase of an annuity at retirement.   
But there are plenty of … counter-arguments for putting annuities in DC plans. For plan sponsors, there are potentially huge expenses associated with evaluating the costs and benefits of different income product vendors and in educating employees. Above, all liability for picking the wrong provider or for giving employers bad (in retrospect) advice scares them. “Fiduciaries are paranoid and rightly so,” says Sheldon Smith, an ERISA attorney and president of ASPPA.
As for participants, most of them won’t retire from their current employer/plan sponsor. From the participant perspective, the average person spends only 4.2 years in any particular job and might participate in several 401(k) plans. There are also portability issues. Participants may want to change employers or get out of income products. Employers may want to change annuity providers.
Adapting recordkeeping systems to multiple income options, or options that might change suddenly, could also pose problems, especially for small employers. Ninety-percent of plans have fewer than 100 participants. Only the largest 10% of plans, which account for 85% of all participants, may be able to cope with the legal, educational, and recordkeeping challenges of in-plan options.  
Other problems: most 401(k) accounts, even at retirement, are too small to annuitize at all, let alone big enough to allow for the ideal solution: partial annuitization. Annuity purchases can also trigger the need for spousal approval, potentially increasing paperwork for sponsors. Gender-neutral pricing rules in 401(k) plans also mean that retail annuities, which have gender-specific pricing, can offer men much higher payout rates than in-plan annuities.
Alternate vision
The zeal for putting guaranteed income options in DC plans is limited mainly to insurers. Asset managers … which are the custodians of millions of rollover IRAs, believe that most people will consolidate their tax-deferred savings in an IRAs and then buy an annuity—or simply take systematic withdrawals. Investment advisors think along the same lines, and millions of Americans are likely to take this path.
Even if you build in-plan annuities, will they come? There’s a lot of disagreement over whether Americans want in-plan annuity options. Even in DB plans, 90% of retirees who have the option choose lump sum payouts over lifetime income streams. Shlomo Benartzi of UCLA, and an Allianz Life consultant, cited evidence of high annuitization rates in some companies, and MetLife said participants like a partial annuitization option. But the evidence is inconsistent. Most people don’t want to give up control over their assets or even part of their assets, especially not at time they stop working, when their retirement plans are still unsettled.
There’s also the crowding-out problem. Thanks to Social Security, most middle-class plan participants will get at least half of their retirement income coming from an annuity, and have no compelling reason to annuitize their DC savings. On the contrary, they may need their DC assets to stay liquid for emergencies, bequests, weddings or simply long-deferred pleasures.
To overcome this resistance or inertia, some witnesses said, the government might have to approve a qualified default annuity option, analogous to auto-enrollment and the qualified default investment options in 401(k) plans. One witness, Josh Shapiro of the National Coordinating Committee for Multiemployer Plans, asserted that nothing short of mandatory annuitization of DC assets at retirement will really change the game. The DoL and Treasury, as well as sponsors and plan providers, have already ruled that out.
© 2010 RIJ Publishing LLC. All rights reserved.
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Some 401(k) Plans Are Adding an Annuity Option
Published: September 15, 2010
BURDENED with a reputation for being inflexible and expensive, annuities have never been popular in retirement plans. But insurance companies and Wall Street investment firms have produced a new crop of products that fiddle with the standard structure.
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Minh Uong/The New York Times
Their idea is that these products can promise employees the security of a traditional pension, while freeing employers from the task of paying for it. However, they are still having trouble breaking through the A-barrier.
Hewitt Associates LogoImage via WikipediaOnly 2 percent of 401(k) plans include some sort of annuity or insurance option as an investment choice alongside standard stock and bond funds, according to Hewitt Associates, a benefits consulting firm in Lincolnshire, Ill. An additional 3 percent are “very likely” and 17 percent are “somewhat likely” to add the category this year, Hewitt says.
Promoters hope that hearings this week, sponsored by the Treasury and Labor Departments, will lead to federal regulations that clarify some of the administrative concerns.
“Most people would want, as they approach age 50, to have some sense of what level of income they would have at retirement,” said Thomas J. Fontaine, global head of defined contributions at the investment management firm AllianceBernstein, one of more than a half-dozen insurance companies and money managers devising these products. “And they will want to know that they will have that income for life.”
The products work in two basic ways. The most common varieties are tied to target-date funds — premixed funds that base their investment strategy on the date the employee hopes to retire, automatically changing the mix as the date draws nearer.
In the AllianceBernstein model, an increasing portion of the target-date assets are shifted to a special guaranteed fund starting at age 50, with 100 percent in that fund by five years before the retirement date. Although the product isn’t complete, Mr. Fontaine said he expected it to guarantee a 5 percent rate of return for life, for a fee of about 1 percent of the assets.
Prudential Retirement has a product that combines a group variable annuity with a target-date fund, basically insuring against market downturns, also for a 1 percent fee. It guarantees that each year for the first 20 years of retirement, an investor can withdraw an amount equal to 5 percent of the assets that were in the target-date fund at its highest year, even if the market crashed the year before retirement. After 20 years, Prudential starts paying that 5 percent.
The MetLife Building (formerly the Pan Am Buil...Image via WikipediaMetLife’s Personal Pension Builder takes a wholly different approach, akin to a deferred fixed annuity. Each time someone makes a 401(k) contribution, all or part of the money essentially buys a mini-annuity (also known as a laddered annuity), getting the prevailing interest rate at that time. Thus, a person who contributed every two weeks would be purchasing 26 mini-annuities that year.
What all these products have in common is that employees use their 401(k) assets to buy a guaranteed, steady payout for the rest of their lives after they retire. The cost is usually around 1 percent of the assets guaranteed, on top of the regular 401(k) fees.
For many people, the added security is worth the price.
“We insure everything — disability, our car, our house — but we don’t insure the risk that we could outlive our assets,” said Pamela Hess, Hewitt’s director of retirement research. She recommended that people use this kind of guarantee for around half of their 401(k) assets.
There are other concerns, however. Because so many parts are movable — including the interest rate, the retirement date and the amount of the contribution — companies worry about the administrative difficulties. It is not as simple as having one small-company stock fund for the whole work force.
Like a standard annuity, some of the new products depend on a single insurance company’s staying in business long enough to keep paying out the guarantees, maybe for decades.
“How do you fix this if it’s not the right provider?” Ms. Hess asked.
Jody Strakosch, MetLife’s director of retirement products in the United States, has a ready reply for that sort of criticism: “MetLife has been meeting our financial obligations for 140 years.”
And John Kalamarides, the senior vice president of retirement strategies and solutions at Prudential, said new “safe harbor” rules from Washington could relieve some employers’ fiduciary concerns in selecting insurance companies.
On the plus side, the target-date-related products are more flexible than annuities. Investors can pull out their money at any time, although that means they will have paid the extra fee for nothing.
The firms pitching these products say demand is growing. In a survey of 1,300 companies last fall, MetLife found that 44 percent of employees “would like my employer to offer an annuity option” in their 401(k) or similar retirement plan. A MetLife spokeswoman acknowledged that the statement could refer to rolling over the 401(k) into an annuity at retirement, as well as having an investment option.
Stephen P. Utkus, who runs the Center for Retirement Research at the Vanguard Group — which does not sell any of these new products — said that trying to buy security with a 401(k) investment was a mistake. The best approach, he says, is simply to build a bigger nest egg.
“Our clients view having a portfolio of assets itself as a form of security,” he said.
A version of this article appeared in print on September 16, 2010, on page F2 of the New York edition.
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Monday, September 13, 2010

Pros and Cons of Cashing Out Your 401(k) to Start a Business

September 09, 2010 11:36 am by paulag01 in Money
The combination of a bad lending environment, the economy, and the uptick in people starting businesses have made tapping retirement funds a very tempting business financing option.  Is it right for you?
If you listen to any of the financial experts, the message "never touch your 401(k)" gets repeated over and over.  …  Yet it is happening more frequently than you think, it is legal (if certain tax code provisions are followed), and it doesn't have to be the all-or-nothing doomsday scenario.
A recent article in Inc. Magazine details "How to Finance a Business with your 401(k)".  Here's how it works.  Essentially you establish a C corporation for your new business that has been created but has not issued stock.  The new corporation adopts a retirement plan.  You roll over your 401(k) to the new corporation's plan. The new corporation issues all of its stock and transfers it to the new profit-sharing plan in exchange for the cash.  Voila, instant cash flow.
The process of using a rollover as business start-up is often referred to as "ROBS." You can read more about this in Tapping Retirement Money for Your Business? Be Careful.  It is particularly appealing for franchise opportunities:
But an article published in Franchise Times cited compelling figures from franchise-data firm FranData that showed more than 4,000 businesses started using ROBS funding last year. More than 60 percent of those businesses were franchises.
Back in 2008, the IRS did express its displeasure about the ROBS plans in a retirement-plan newsletter, so Uncle Sam may not be as enthusiastic about this approach as some entrepreneurs.
So is it right for you or not?
The Franchise King had this to say about using your 401(k) to fund your franchise business.  Bottom line?  Get educated, make an educated decision ... for you.
Here are some pros and cons to consider:
  • Relatively quick and easy access to potentially large sums of cash without having to qualify for a loan.
  • You leverage your own cash to build something of value, essentially becoming your own venture capitalist (needless to say, this is only a positive if the business thrives).
  • Up to 100 percent of your retirement funds can be used, but you can diversify and use only a portion to fund your business venture leaving the rest of your retirement assets intact.
  • You put your future retirement and financial security at risk should the business fail.
  • Must hire a tax attorney or CPA to handle the formation of the corporation and retirement plan.
  • These provisions may be under scrutiny (or that is the picture some paint) by the IRS.
Paula Gregorowicz, owner of The Paula G. Company, offers life and career coaching for women to help you figure out what you want to do with your life and career and cultivate the confidence to be the person you most want to be so you succeed on your own terms. Learn more about The Life Alchemy Success Formula™ and Get the free eCourse "5 Steps to Move from Fear to Freedom & Experience Greater Confidence" at her website.
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Friday, September 10, 2010

Creating value in the age of distributed capitalism

As mass consumption gives way to the wants of individuals, a historic transition in capitalism is unfolding.

McKinsey Quarterly - Strategy - Strategic Thinking
SEPTEMBER 2010 • Shoshana Zuboff

Creating value in the age of distributed capitalism article, era of mass consumption gives way, Strategy
Capitalism is a book of many chapters—and we are beginning a new one. Every century or so, fundamental changes in the nature of consumption create new demand patterns that existing enterprises can’t meet. When a majority of people want things that remain priced at a premium under the old institutional regime—a condition I call the “premium puzzle”—the ground becomes extremely fertile for wholly new classes of competitors that can fulfill the new demands at an affordable price. A premium puzzle existed in the auto industry before Henry Ford and the Model T and in the music industry before Steve Jobs and the iPod.
The consumption shift in Ford’s time was from the elite to the masses; today, we are moving from an era of mass consumption to one focused on the individual. Sharp increases in higher education, standards of living, social complexity, and longevity over the past century gave rise to a new desire for individual self-determination: having control over what matters, having one’s voice heard, and having social connections on one’s own terms. The leading edge of consumption is now moving from products and services to tools and relationships enabled by interactive technologies., Apple, eBay, and YouTube are familiar examples of companies solving today’s premium puzzle. Lesser-known companies like CellBazaar (in emerging-market mobile commerce), TutorVista (in tutoring), and Livemocha (in language education) also abound.
It would be easy to construe these as isolated cases of innovation and industry change, but I believe they represent much more: a mutation in capitalism itself. … Innovations improve the framework in which enterprises produce and deliver goods and services. Mutations create new frameworks; they are not simply new technologies, though they do leverage technologies to do new things. Historically, mutations have superseded innovations when fundamental shifts in what people want require a new approach to enterprise: new purposes, new methods, new outcomes.
In the same way that mass production moved the locus of industry from small shops to huge factories, today’s mutations have the potential to shift us away from business models based on economies of scale, asset intensification, concentration, and central control. That’s not to say factories are going away; their role in supplying quality, low-cost goods, including the technologies underpinning the shift to more individualized consumption, is secure. Yet even mass production is becoming less homogenous (consider the ability to order custom sneakers from Nike). And for many goods and services, new business frameworks are emerging: federations of enterprises—from a variety of sectors—that share collaborative values and goals are increasingly capable of distributing valued assets directly to individuals, enabling them to determine exactly what they will consume, as well as when and how. This shift not only changes the basis of competition for companies but also blurs—and even removes—the boundaries between entire industries, along with those that have existed between producers and consumers. The music and newspaper industries ignored this shift, to their great detriment. I believe all businesses will have to find ways to adapt to this new world if they want to grow.
The economist Joseph Schumpeter cautioned his readers not to expect new forms of economic development to announce themselves with a grand flourish. “The ‘new thing,’” he wrote, “need not be Bessemer steel or the explosion motor. It can be the Deerfoot sausage.”1 My hope is that this article will help executives see the links between today’s “Deerfoot sausages,” recognize the magnitude of the economic transition these mutations portend, and begin setting—or at least contemplating—a new course in this changing world.
It won’t be easy. But enterprises that can leverage technology and real-world social connections to solve their piece of the premium puzzle—creating individualized ways to consume goods and services at a radically reduced cost—will prosper as they realize wholly new sources of value that remain invisible to companies still bound by conventional business models.

Mutation and distributed capitalism

The last chapter of capitalism unfolded in the early 20th century and was epitomized by Henry Ford and his Model T. …The Model T embodied a mutation we now call mass production. It solved the premium puzzle of its time, reducing the price of an automobile by 60 percent or more, and thrived in the emerging environment of mass consumption.
Ford’s Model T not only changed the entire framework of production but also set the stage for another automotive pioneer, Alfred Sloan, to establish the modern, professionally managed, multidivisional company as the basis for wealth creation in the 20th century. In the end, the Model T’s power had nothing to do with cars per se. Mass production could be applied to anything—and it was. It provided the gateway to a new era because it revealed a parallel universe of economic value hidden in mass-market consumers and accessible to companies that could create affordable versions of previously unattainable goods such as cars. That potential for wealth creation remained invisible to those who clung to the 19th-century framework of small-factory, proprietary capitalism.
The mass-production business model has come under assault during the past decade, perhaps most successfully by the combination of Apple’s iPod and its music service, iTunes. The iPod is … also a gateway product, one of the first to achieve both scale and commercial success while expressing a new mutation. The iPod and iTunes reinvented music consumption by starting with the listener’s individual space, which I call “I-space.” Apple rescued musical assets from a faltering business model…. It supported users in reconfiguring their music as they saw fit. … But I would argue that the real breakthrough had nothing to do with music per se. The true source of value, which had been invisible to the music industry, resided in Apple’s ability to reinvent the consumption experience from the viewpoint of the individual, at a fraction of the old cost.
The iPod—and its successors, the iPhone and the iPad—are part of the first wave of what I call “distributed capitalism,” which encompasses the myriad ways in which production and consumption increasingly depend on distributed assets, distributed information, and distributed social and management systems.2 Distributed capitalism could not thrive without the technologies associated with the Internet, mobile computing, wireless broadband, and related developments in digitization and software applications. But just using these technologies does not ensure success.
Winning mutations—those that create value by offering consumers individualized goods and services at a radically reduced cost—express a convergence of technological capabilities and the values associated with individual self-determination. The iPod and scores of other successful mutations have infiltrated the economy sufficiently to provide preferred alternatives to established sources of goods and services across many industries. Taken together, they have begun expressing a distinctly new “genetic code” that encompasses five essential functions:


The old logic of wealth creation worked from the perspective of the organization and its requirements—for efficiency, cost reductions, revenues, growth, earnings per share (EPS), and returns on investment (ROI)—and pointed inward. The new logic starts with the individual end user. … This inverted thinking makes it possible to identify the assets that represent real value for each individual. Cash flow and profitability are derived from those assets.


Once valuable assets have been identified, they must be rescued from old, costly industry structures. … Rescuing assets means digitizing them whenever possible for easy and affordable distribution to users in I-space.


… By leveraging digital technologies and new social arrangements, these mutations are bypassing existing institutional structures … and connecting individuals directly to the assets they seek. Just as a coronary bypass ignores a damaged blood vessel and takes blood to its destination another way, so mutations like iTunes or distance learning simply bypass the unnecessary costs, outdated assumptions, and value-destroying practices of legacy systems.


Once individuals have the assets they want, they must be able to reconfigure those assets according to their own values, interests, convenience, and pleasure. A teenager, for instance, may use her iPod Touch … to assemble an entire personalized “radio station” while at the same time learning Mandarin Chinese … through an online classroom based thousands of miles from her home.


… The new sources of economic value can be discovered and realized in I-space only when consumption strengthens the sense of personal control, delivers opportunities for voicing ideas, and enables freely chosen social connections. The emerging logic of distributed capitalism rewards enterprises that realign their practices with the interests of the end consumer and punishes enterprises that try to impose their own internal requirements or, worse yet, maximize their own benefit at the expense of the individual end user.
…[Early] mutations address individual needs that are invisible from the perspective of a typical company and target the kinds of trapped assets that are both valuable to individuals and easily digitized (to learn more about how mutations vary in the degree to which they incorporate these five functions, see the interactive exhibit, “A taxomony of mutations” ).

A taxonomy of mutations
Mutations in capitalism vary in the degree to which they have developed each of the five functions essential to the new "genetic code."
Launch Interactive

The next test for distributed capitalism

Can distributed capitalism go further? What happens when it confronts … arenas where face-to-face experience is essential? This is when distributed capitalism, … will begin to mature as it takes aim at core economic functions with a second wave of more complex mutations that combine virtual and real-world assets.

Early mutations in health care

The premium puzzle has become the defining characteristic of most individuals’ health care experiences: the health care one can afford is rarely the health care one wants. … But it is sure to intensify elsewhere as aging populations make it harder for governments to finance today’s systems.
In the vacuum created by these frustrations, many people concluded that they must first try to help themselves and their families before turning to professionals. Mutations such as WebMD arose, aimed at capturing, interpreting, and distributing information once held closely within the medical enclave. Such sites are now credible ways to acess information that doctors just won’t provide at a price people can afford—and sometimes at any price.
Another group of mutations has emerged in the areas of home-based diagnosis, monitoring, and testing. … Distribution has even gone mobile with cell phones that monitor blood glucose levels and heart rates, connect you to hot lines, signal the calorie count of your cheeseburger, or register the energy you burn as you walk your dog.

Radical mutation in elder care: A case study

One of the most intractable premium puzzles in the health care system today is elder care. The average annual cost of nursing-home care in the United States approaches $80,000. Only a small percentage of US residents can afford these prices, while state and federal funding is shrinking. Further, nursing homes tend to be for-profit businesses in which cost imperatives lead to understaffing and low wages. Dismal data on bedsores, medical errors, and elder abuse suggest that elder care as generally practiced is a euphemism for human warehousing on the cheap.
A Maine-based start-up called Elder Power (EP) has taken direct aim at the elder care premium puzzle. It showcases new capabilities and strategies that integrate digital and face-to-face support, and its initial success provides important guidance on solving today’s premium puzzle in the physical world. …The average monthly cost in Maine exceeds that in the United States as a whole … In contrast, EP has enabled seniors to remain at home at an average monthly cost of $702–$378 for technology and $324 for personalized support. EP enables seniors to be secure, socially enriched, and personally empowered for 3 percent of the average cost of conventional home care in Maine, 10 percent of the average cost of a nursing home, and 18 percent of the average cost of assisted living.
Before explaining how this is possible, I want to offer two caveats. First, the reason I have such detailed information about EP is that my husband and collaborator, Jim Maxmin, is one of its architects. Jim holds shares in the company, which is a for-profit community network whose profits are entirely reinvested in the network to support its neediest participants. Second, EP is a tiny experiment, with (as of March 2010) 56 members. This group does not, however, represent an easy-to-serve population: many have mild to severe Alzheimer’s disease.
EP has a significant technology component. Each elder person’s home is equipped with a “digital spine,” with members opting for various technology levels, from the basic tools (emergency alert, a stationary webcam, a videophone, and a computer interface) to more elaborate systems that include multiple webcams, sensors, and around-the-clock monitoring. A Web site provides access to a community calendar, local services, a story and poetry corner, video clips, advice, e-mail, and an EP Facebook page. There is also a Web-based Elder Power TV network, which features local events such as plays and church services. The technology reassures families that the elder person is well and the network is there to help.
As is crucial to second-wave mutations, the EP model extends beyond the digital realm. EP is a social network that includes members; their families, friends, and neighbors; volunteers; paid staff; and professionals. Each member has a personal advocate within the network who helps coordinate the use of EP’s services. In addition, EP expects members to take an active role in their own well-being and to help others in the network. A partially disabled housebound member, for example, oversees the daily monitoring.
Financial surpluses generated by the EP model help to offset the expenses of volunteers and to reward them with meal vouchers, gasoline, film tickets, and the like. This combination of paid and unpaid support services means that one registered nurse employed by EP can serve more than 60 remote seniors. EP estimates it would take 40 to 50 volunteers to support 1,000 seniors.

Strategies for radical mutation

Elder Power exemplifies four new strategies for pulling off radical mutations in arenas where real-world—not just digital—assets are integral to the individual experience. First, it’s a federation, by which I mean a branded constellation of enterprises drawn from many industry sectors that revolves around the individual—such as a local utility that gives EP members top priority in the monitoring and emergency maintenance of home electrical and heating systems. Second, EP identifies, uses, and remunerates underutilized community and network resources (services, spaces, people, capabilities, and goods) that are “hidden in plain sight,” such as the local high-school cafeteria, where elders dine weekly after the regular lunch period ends, or an extra bedroom in a member’s home that can be used for another elder to recuperate after a hospital stay.
Third, EP leverages available resources by distributing work: one volunteer or member might make two daily phone calls. Another might transport a group of seniors to lunch once a week. A third might coordinate the evening meal for three seniors in her neighborhood. Finally, EP relies on what I call “I-metrics,” which realign business practices with the experience, values, and priorities of the people an enterprise serves. For EP, I-metrics reflect subjective evaluations such as “I feel safe and happy at home,” “I feel needed,” or “I can get down to the back meadow to see the spring flowers.”
Elder Power is far from the only place where the importance (and sometimes the difficulty) of implementing these strategies is revealing itself. Consider federation: since Apple understood that its iPod users wanted to be connected to one another, … it broadened the scope of its offerings, creating new partnerships and business models at each turn as the stand-alone iPod morphed into the iPhone. The choice to host applications on the iPhone further accelerated this process, reimagining the iPhone as a portal to an ever-widening “protofederation” of support providers.
But creating effective federations is challenging. … [Apple and Facebook] began by regarding applications as simply hosted transactions … but are evolving toward a recognition that applications are a seamless extension of their end users’ experience. And both are confronting the following challenge: how much control will they, as the coordinators of their respective federations, exercise, compared with other member enterprises and with end users? …These kinds of relationships are the early building blocks of federated support networks.

Embracing distributed capitalism

While Elder Power is operating on a tiny scale, its way of solving the premium puzzle in elder care offers a vivid demonstration of what I believe will be core features of the 21st-century economy: creating new social and enterprise frameworks that operate on behalf of individual end users, enabling them with the tools, platforms, and relationships to live their lives as they choose. The range of individual support underlying many of today’s mutations is wide.
What should executives do to ensure that their organizations will grow in this new world? For starters, it’s critical to question the old logic and vocabulary of competitive strategy. …[Mutations] do not arise within industries; they arise as reconfigurations of assets defined by the unmet needs of individual end users. Mutations take root in individual space, and they quickly blur the boundaries of industries, sectors, and enterprises—ultimately making those boundaries obsolete. Is, for instance, in the retail, the logistics, or the Web-services industry? The question no longer makes sense.
One way for executives to shake up their strategic thinking is to start with the radical question of how a mutation could destroy the boundaries of their industries.
As mutations move into the physical world, it’s easy to imagine a similar blurring of boundaries: … In short, mutations that upend industries can come from anywhere, and conventional forms of market analysis and competitive strategy will miss those mutations.
One way for executives to shake up their strategic thinking is to start with the radical question of how a mutation could destroy the boundaries of their industries. In my mind, that danger increases under the following circumstances:
  1. The products or services you offer are affordable to few but desired by many.
  2. Trust between you and your customer has fractured. The average person’s trust in business has been in steep decline for the past 30 years, and the distance between what today’s businesses can deliver and what individuals want is only growing. This problem makes all consumer-facing industries—especially financial services, health care, insurance, autos, airlines, utilities, media, education, and pharmaceuticals—particularly vulnerable.
  3. Your business model is concentrated, with a high level of fixed costs, a large percentage of which could be distributed, delegated to collaborators, or shifted to the virtual world. Here, too, most existing industries are deeply vulnerable.
  4. Your organizational structures, systems, and activities can be replaced by flexible, responsive, low-cost networks. A neighborhood watch, citizen journalists, online peer support, and peer-to-peer reviews and information sharing are all examples.
  5. There are hidden assets, outside institutional boundaries, that are underutilized but could replace your fixed costs, add capacity, or add new capabilities.
  6. You don’t have all the tangible or intangible assets required to meet your customers’ needs.
  7. Your end users have needs and desires that you haven’t imagined and have no way to learn about. Unless you make a strategic commitment to explore I-space, you’ll learn about this vulnerability only when your end users migrate elsewhere. This has already been the experience of executives in industries such as recorded music, newspapers, broadcast news, and travel.
Despite the drama and significance of historic transitions in capitalism, they do not announce themselves. The pattern of change is one of overlapping and interwoven fields of transition rather than clean, unidirectional breaks. For those of us living through these transitions, they can be confusing and frustrating; resources invested in innovation serve only to fix what was, bringing us no closer to the future. But these times are also rich with unique opportunities for companies able to decipher the emerging pattern of mutation and to convert that understanding into new business models that support the complex needs of the 21st-century individual.

About the Author
Shoshana Zuboff, the former Charles Edward Wilson Professor of Business Administration at the Harvard Business School, is the author of In the Age of the Smart Machine: The Future of Work and Power (Basic Books, 1989), among other books.
1 Joseph Schumpeter, “The creative response in economic history,” Journal of Economic History, 1947, Volume 7, Number 2, pp. 149–59.
2 Distributed capitalism—and the shift away from business models based on economies of scale, asset intensification, concentration, and central control—was first described in my 2002 book, The Support Economy: Why Corporations Are Failing Individuals and the Next Episode of Capitalism, which I wrote with Jim Maxmin.
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