Business Enhancement Associates Aha! Moments: May 2013

Friday, May 31, 2013

E-Paymernts Growing, But Still Brings Risks

Small and midsize companies should approach electronic payments cautiously.
Tech | May 22, 2013 | CFO.com:
Marielle Segarra

Electronic payments are becoming more popular among small and midsize businesses. In a recent report by consulting firm Greenwich Associates, 43% of small companies and 55% of large middle market companies said they expect to increase the number of e-payments they make over the next 12 months.

A Fraud Scheme provided by FBI (Photo credit: Wikipedia)

Greenwich said companies are embracing electronic payments because they want to increase cash flow, improve security and lower costs. But e-payments come with their own security pitfalls.

Small and midsize companies may not realize that banks are not required to protect them from payment fraud, says Peter Bible, chief risk officer at accounting firm EisnerAmper. UnderRegulation E, a regulation established by the Federal Reserve, banks are only responsible to protect “natural persons” (human beings), not corporate customers, from fraud.

“The law is written for people like you and me,” Bible says. “Until two or three years ago, when things were still done with checks and security was not really an issue for wire transfers, most companies had very good controls in place to keep theft from occurring. But the hackers have really taken this to a new level.” ...

English: A map of the 12 districts of the United States Federal Reserve system. (Photo credit: Wikipedia)

Even the banks that do make efforts to prevent payment fraud “don’t do a very good job,” Bible says. “Financial hacking has really been elevated to an art form over the last two or three years,” he says. “The credit card companies are very good at finding fraud. But the banks’ systems are just not that sophisticated.”

Payment fraud is a “huge concern,” particularly for smaller companies, says BC Krishna, president and CEO of MineralTree, an online payment tool provider. “It’s a very complicated problem, because fraudsters are generally ahead of the game,” Krishna adds. “There’s a gap between the current state of the defenses and the nature of the fraud itself.”

Though payment fraud is difficult to quantify, “many people say it runs close to $1 billion a year and that it’s growing,” Krishna says. “It tends to affect small and medium-size businesses, because they’re the ones that have the weak controls, as opposed to the larger corporations.”

Bible agrees. “For larger entities, they’re going to catch it if someone has hacked their bank account,” he says. “Most major companies have very good controls and they look at their cash activity daily if not hourly. But you just don’t have that luxury in a small organization.”

The Greenwich Associates survey also found that while companies are eager to embrace electronic payments, many are reluctant to recommend their current banks for e-payment services. The survey defined small businesses as those with revenues between $1 million and $10 million and large middle-market companies as those with revenue between $100 million and $500 million.

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Feds Deal a Blow to Wellness Programs

New regulations could make certain programs more costly and, worse, hinder them from achieving goals that can reduce a company’s health-care costs.

CFO.com
:Health Benefits | May 30, 2013
David McCann

Final regulations for operating wellness programs in compliance with the Affordable Care Act, issued on Wednesday, could increase companies’ costs and dilute the value they aim to get from the most rigorous programs.

“Outcome-based” wellness programs, which require participants to attain or maintain one or more specific health outcomes in order to get a reward or avoid a penalty, may be significantly compromised. (Such outcomes could be, for example, weight loss, blood-pressure level, certain biometric-screening results or smoking cessation.)

Existing rules for such programs under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) require employers to offer a “reasonable alternative standard” that gives an opportunity to earn the reward or avoid the penalty to employees who, for medical reasons, can’t or shouldn’t try to achieve the health outcome. Such employees must prove their eligibility for the exception with a physician’s certification.

English: The graph shows the correlation between body mass index (BMI) and percent body fat (%BF) for men in NCHS' NHANES III 1994 data. The body fat percent shown uses the method from Romero-Corral et al. to convert NHANES BIA to %BF (June 2008). "Accuracy of body mass index in diagnosing obesity in the adult general population". International Journal of Obesity 32 (6) : 959–956. DOI:10.1038/ijo.2008.11. PMID 18283284. (Photo credit: Wikipedia)

But the new regulations – issued jointly by the departments of Labor, Treasury, and Health and Human Services, and effective for companies’ first health-plan year starting after Dec. 31, 2013 – eliminate the physician-certification requirement for outcome-based programs. Any participant who does not meet an initial standard for getting the reward or avoiding the penalty – for instance, having a body mass index (BMI) under 30 at the program’s launch and then staying under that threshold for a year – can simply opt for the alternative standard.

“Regardless of the type of wellness program, every individual participating in the program should be able to receive the full amount of any award or incentive, regardless of any health factor,” the regulations state. The reason for that is “to ensure that the program is reasonably designed to improve health and is not a subterfuge for underwriting or reducing benefits based on health status.”

English: 8 women with the same Body Mass Index rating (BMI - 30) but with different weight distribution and abdominal volume, so they have different Body Volume Index (BVI) ratings. Select Research, 09-09-08 (Photo credit: Wikipedia)

Also of note, outcome-based programs, specifically, “must offer a ‘reasonable alternative standard’ (or waiver of the otherwise applicable standard) to a broader group of individuals than is required for activity-only wellness programs.” With activity-based programs, ... participants earn awards or avoid penalties simply by engaging in an activity – for example, just participating in a weight-loss program, rather than having to actually lose a certain percentage of weight.

In most cases, the alternative standards companies set for outcome-based programs are much easier to achieve than the normal standards, notes Steve Wojcik, vice president of public policy for the National Business Group on Health (NBGH), which represents the interests of 364, mostly large companies on healthcare-related matters. Often the alternative is activity-based rather than outcome-based, diluting the distinction between the two kinds of programs.

“If you have lots of people opting out from the standard, it could reduce the effectiveness of the program,” says Wojcik. “The whole reason for incentives is to induce people to work on their health.” He likened the new rule to an element of today’s youth sports, “where everyone gets a trophy, everyone is a winner. You don’t even have to try.”

And the new regulations could raise the costs of outcome-based programs, he says, because the company may have to deal with each person opting for the alternative standard on a one-on-one basis, possibly talk with their physicians, and figure out a program for each person that enables him or her to get the incentive.

“This adds a layer of complexity to these programs that will make employers think harder about offering one,” Wojcik says. “It’s already difficult to move the needle on employee health, but it’ll probably be more difficult now.”

According to results of a study by NBGH and Fidelity Investments released in February, 41 percent of surveyed employers offered wellness programs with outcome-based elements or planned to start doing so.

The new regulations also increase the maximum reward employers can offer in wellness programs, to 30 percent of the total cost of an employee’s health coverage (both the employer and employee shares), from 20 percent under HIPAA. The reward can be up to 50 percent of that cost for smoking-cessation programs. However, even now few companies offer rewards anywhere near the current 20-percent level, Wojcik notes.

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Thursday, May 30, 2013

Transforming your 401(k) into steady income

Retirement (Photo credit: 401(K) 2013)

A job and a paycheck - they go together like coffee and cream. But when you retire from your regular job, does that mean you have to give up the cream?
Reuters:

By Mark Miller

CHICAGO | Tue May 21, 2013 11:59am EDT

A growing number of 401(k) plans are including investment choices that can help savers convert nest eggs into retirement income. Participants can buy insurance annuities or other products designed to spread funds over a lifetime.

These programs aim to make 401(k)s more like traditional pensions. That's laudable if it helps retirees cope with "longevity risk" - that is, the risk of exhausting savings in a retirement of unpredictable length.

But the new retirement income initiatives have disadvantages too, so savers should proceed carefully. Here are some points to consider if one of them shows up in a 401(k) plan near you.

THE ANNUITIES PUSH

English: Types of Annuities (Photo credit: Wikipedia)

... Currently, only 16 percent of employers offer in-plan annuities, according to a Metlife survey. Employers worry about the complexity of administering an annuity option and the fiduciary responsibility of picking an insurance company, since retirees would need to rely on that underwriter to make payments for decades to come.

The industry is pushing two annuity types for the workplace market - fixed and variable. A fixed annuity allows you to purchase a specified amount of guaranteed income for life, with the payments determined by the amount you invest, prevailing interest rates at the time of purchase (higher is better) and when you want to start receiving the income. The payout on a variable annuity can vary, depending on the earnings of the investments within the annuity.

Either option can be immediate, meaning you don't buy it until you're ready to collect the income stream, or deferred, meaning that you buy it years in advance and let it grow before you tap it.

A popular type of variable annuity for retirement plans is the guaranteed minimum withdrawal benefit annuity, or GMWB, ... Here, you invest in a portfolio of stocks and bonds for 10 years prior to retirement; the initial withdrawal amount is linked to the amount in the account. Payments can rise in subsequent years if the portfolio investments beat certain pre-agreed benchmarks.

The advantage over other annuities is the guarantee: if you die before the assets have been used up, your heirs get what's left. Other annuities, in contrast, require you to surrender control of the invested funds when you start taking payouts, though they tend to offer higher payoffs.

A $100,000 investment in a GMWB might yield annual retirement income of $5,000 for someone retiring at 65, according to calculations from Josh Cohen, defined contribution practice leader at Russell Investments. If the portfolio performs really well, the annual income amount could rise to $5,750 at age 85, but the odds of that aren't good, Cohen says.

The same investment in a fixed deferred annuity would get the retiree $6,360 in annual income. Or, he could take a bit less initial income ($4,836) but get a 2.5 percent annual inflation adjustment that would spin off $7,900 annually at age 85.

Some companies are offering another option: A pre-set portfolio designed to generate income for the long haul. ...

GUARANTEED DRAWBACKS

GMWBs "can be mind-numbingly complex to understand, and it's difficult to figure out what they really cost," says David Blanchett, head of retirement research at Morningstar. They can be pricey, but those tucked inside 401(k)s benefit from lower institutional pricing. ...

Blanchett worries that putting annuities in 401(k)s could prompt some workers to purchase them prematurely. Because of the annual insurance costs, it only makes sense for older workers within a decade or so of retirement to jump in.

Even insurance sellers caution retirees not to annuitize all of their savings, so there are liquid assets left for large and unexpected expenses.

(The writer is a Reuters columnist. The opinions expressed are his own.)

(Follow us @ReutersMoney or here. Editing by Linda Stern)

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Wednesday, May 29, 2013

Motivating people: Getting beyond money

The economic slump offers business leaders a chance to more effectively reward talented employees by emphasizing non-financial motivators rather than bonuses.

McKinsey & Company:
November 2009 | byMartin Dewhurst, Matthew Guthridge, and Elizabeth Mohr

Companies around the world are cutting back their financial-incentive programs, but few have used other ways of inspiring talent. We think they should. Numerous studies¹ have concluded that for people with satisfactory salaries, some non-financial motivators are more effective than extra cash in building long-term employee engagement in most sectors, job functions, and business contexts. Many financial rewards mainly generate short-term boosts of energy, which can have damaging unintended consequences. Indeed, the economic crisis, ... gives business leaders a great opportunity to reassess the combination of financial and nonfinancial incentives that will serve their companies best through and beyond the downturn.

A recent McKinsey Quarterly survey² underscores the opportunity. The respondents view three noncash motivators—praise from immediate managers, leadership attention (for example, one-on-one conversations), and a chance to lead projects or task forces—as no less or even more effective motivators than the three highest-rated financial incentives: cash bonuses, increased base pay, and stock or stock options (exhibit). The survey’s top three nonfinancial motivators play critical roles in making employees feel that their companies value them, take their well-being seriously, and strive to create opportunities for career growth. These themes recur constantly in most studies on ways to motivate and engage employees.

Exhibit

It’s not about the money

Three nonfinancial incentives are even more effective motivators than the three highest-rated financial incentives.

Enlarge

... Money’s traditional role as the dominant motivator is under pressure from declining corporate revenues, sagging stock markets, and increasing scrutiny by regulators, activist shareholders, and the general public. Our in-depth interviews with HR directors suggest that many companies have cut remuneration costs by 15 percent or more.

What’s more, employee motivation is sagging throughout the world—morale has fallen at almost half of all companies, according to another McKinsey survey³ —at a time when businesses need engaged leaders and other employees willing to go above and beyond expectations. Organizations face the challenge of retaining talented people amid morale-sapping layoffs that tend to increase voluntary turnover over the medium term. ...

... Two-thirds of the executives we surveyed cited cost reductions as one of the top three reasons for the changes; 27 percent made changes to increase employee motivation; and only 9 percent had the goal of attracting new talent. ...

Even though overall reliance on financial incentives fell over the past 12 months, a number of companies curtailed their use of non-financial ones as well. Thirteen percent of the survey respondents report that managers praise their subordinates less often, 20 percent that opportunities to lead projects or task forces are scarcer, and 26 percent that leadership attention to motivate talent is less forthcoming.

Why haven’t many organizations made more use of cost-effective non-financial motivators at a time when cash is hard to find? ... “Managers see motivation in terms of the size of the compensation,” explained an HR director from the financial-services industry.

Another reason is probably that non-financial ways to motivate people do, on the whole, require more time and commitment from senior managers. One HR director we interviewed spoke of their tendency to “hide” in their offices... This lack of interaction between managers and their people creates a highly damaging void that saps employee engagement.

Some far-thinking companies, though, are working hard to understand what motivates employees and to act on their findings. One global pharmaceutical company conducted a survey that showed that in some countries employees emphasized the role of senior leadership; in others, social responsibility. ... One biotech company has re-framed the incentives issue by putting the focus on “recognition” instead of “reward” in order to inspire a more thoughtful discussion about what motivates people.

The top three non-financial motivators our survey respondents cited offer guidance on where management might focus. The HR directors we spoke with, for example, emphasized leadership attention as a way to signal the importance of retaining top talent. ...

“One-on-one meetings between staff and leaders are hugely motivational,” explained an HR director from a mining and basic-materials company—“they make people feel valued during these difficult times.” By contrast, our survey’s respondents rated large-scale communications events, such as the town hall meetings common during the economic crisis, as one of the least effective non-financial motivators, along with unpaid or partially paid leave, training programs, and flexible work arrangements. ...

A chance to lead projects is a motivator that only half of the companies in our survey use frequently, although this is a particularly powerful way of inspiring employees to make a strong contribution at a challenging time. Such opportunities also develop their leadership capabilities, with long-term benefits for the organization. One HR director in the basic-materials industry explained that involvement in special projects “makes people feel like they’re part of the answer—and part of the company’s future.” ...

With profitability returning to some geographies and sectors, we see signs that bonuses will be making a comeback: for instance, 28 percent of our survey respondents say that their companies plan to reintroduce financial incentives in the coming year. While such rewards certainly have an important role to play, business leaders would do well to consider the lessons of the crisis and think broadly about the best ways to engage and inspire employees. A talent strategy that emphasizes the frequent use of the right non-financial motivators would benefit most companies in bleak times and fair. By acting now, they could exit the downturn stronger than they entered it.

About the authors

Martin Dewhurst is a director in McKinsey’s London office, where Matthew Guthridge is an associate principal and Elizabeth Mohr is a consultant.

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Proposed 28% Cap on Tax Deductions

NAPA Net:

Email This Post

John Carl •5/28/13 •Add Comment

The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Minnesota ... asked:

“I’ve heard that Capitol Hill may be capping deductions for taxpayers. Is this true, and can you provide more details on the cap?”

Highlights of Discussion

• It is true that the 2014 budget proposal contains a provision that, if enacted into law, would limit the tax value of specified deductions or exclusions from adjusted gross income (AGI) and all itemized deductions for taxpayers in the 33%, 35% and 39.6% tax brackets. The cap would reduce the value of the deduction to 28%. A similar limitation also would apply under the alternative minimum tax.

EXAMPLE: Trina is in the 39.6% tax bracket. She has a deduction worth $100. Under present law, the deduction would save her $39.60 in taxes. Under this proposed cap, the value of her tax savings would be reduced to $28.

• The income exclusions and deductions that could be limited by this provision would include the following:
— Employee contributions to defined contribution retirement plans and individual retirement arrangements
— Any tax-exempt state and local bond interest
— Employer-sponsored health insurance paid for by employers or with pretax employee dollars
— Health insurance costs of self-employed individuals
— The deduction for income attributable to domestic production activities
— Certain trade or business deductions of employees
— Moving expenses
— Contributions to health savings accounts and Archer Medical Savings Accounts
— Interest on education loans
— Certain higher education expenses
• If a deduction or exclusion for contributions to retirement plans or individual retirement arrangements is limited by this proposed cap, then the taxpayer’s basis will be adjusted to reflect the additional tax imposed.
• As proposed, the 28% cap on deductions would take effect Jan. 1, 2014.

Conclusion

It is important to keep in mind that the 2014 budget proposal merely starts the formal budget negotiation process with the House and Senate. The 28% cap on deductions is only a proposal at this point. Financial advisors who understand the importance of any potential changes to contribution and accrual limits and/or deductions set themselves apart from the average advisor and are better positioned to support their clients.

The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.

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Friday, May 24, 2013

Social Business: Valuable Inside as Well as Out

Improved internal communications and collaboration may be as important as engaging your customers.

CFO.com:
Taylor Provost

When’s the last time you approached an employee, ... and asked, simply, “What do you think of this?” If you can’t recall, says Vala Afshar, chief marketing and customer officer for network security firm Enterasys, your business is probably missing out on innovations and ideas fostered by a culture of collaboration.

Afshar participated in a panel discussion on realizing the potential of social business at Wednesday’s MIT Sloan CIO Symposium in Cambridge, Mass. While the panel spent some time on the often-discussed benefits of a strong customer-facing social media strategy, the most compelling aspects of the session centered on the effects of improved internal communication and collaboration made possible by social business tools embedded within CRM and ERP systems.

English: Avaya's logo. This SVG version, created by me (User:Crotalus horridus) is designed to replace the old PNG logo on the Avaya article. (Photo credit: Wikipedia)

Laura Bassett, director of customer experience management and emerging technologies at business collaboration software company Avaya, told the audience that higher employee engagement helps companies outperform their peers in the industry, and had the facts to back it up: A 2012 Gallup survey found that companies with highly engaged employees have 3.9 times the earnings per share growth rate compared to organizations with low engagement scores. ...

To Kim Stevenson, corporate vice president and CIO of Intel, social business is about “achieving the most efficient processes you can have inside your company.” Intel is an enormous organization of 100,000 employees in 200 global facilities, she said, and the biggest problem it faces is finding the people and information that will help an employee get the job done as quickly as possible. They’ve implemented an enterprise social platform to address that problem. And since Enterasys began using Chatter, added Afshar, he has a seen a direct causal link between employee collaboration and company growth. “We’ve seen growth for the last four years and we’ve been a social business for the last four years,” he said.

Technology no doubt makes internal communication easier, the panel argued, but a company must make the conscious effort to adopt a “culture of connectedness,” a philosophy whereby employees are free to share their ideas and know that their colleagues and superiors are really listening, before they can make social business tools worth their while. “You have to think in transformation mode and really help employees understand their role in the value creation process,” said Stevenson. Without active participants, she said, all the collaboration tools in the world are useless to you. ...

The overarching lesson for businesses offered by the panel is that social business goes beyond an outward-facing social media policy. Instead, CIOs, CFOs and other company leaders should look inward to figure out how social and collaborative tools can further connectedness within the organization, and thus boost creativity, innovation and, ultimately, profitability.

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Friday, May 31, 2013