Business Banking E-Newsletter - March 2012

Transferring Wealth with a Stretch IRA

Want a way to flex some retirement planning muscle? Then consider a "stretch" (inherited) IRA. Not only can this strategy preserve wealth for future generations, it also has the potential to keep assets growing in a tax-deferred account for years to come. Here's the inside scoop, based on one hypothetical family situation.

One Scenario

Imagine that George has accumulated $50,000 in a traditional IRA. His wife, Amy, should be well cared for through a $500,000 life insurance policy, his work pension plan, as well as several pieces of real estate and investment accounts they have transferred to a trust. Although Amy is also the beneficiary of his IRA, he wonders if it might be better to leave the IRA to their 25-year-old son Robert.

George meets with his financial consultant and finds out that in 2002, the IRS finalized rules simplifying the process of taking required minimum distributions — that's the minimum amount that you must withdraw each year from tax-deferred retirement accounts after you reach age 70 1/2. The new rules extend the IRS's life expectancy table, reducing the amount that must be withdrawn each year and making it much easier to "stretch" IRA assets to future generations.

Weighing the Benefits

George discovers that a non-spousal beneficiary of an IRA can receive distributions based on his or her own life expectancy. That means if Robert is the beneficiary of the IRA, the distributions could be stretched out over his entire lifetime.

Alternatively, Bob could name both his wife and son as primary beneficiaries. If Amy decided she didn't need the income from the IRA, she could then allow Robert to become sole beneficiary of the account. Yet another possibility: George could bequeath the IRA to his one-year-old granddaughter Heather, allowing her to take advantage of tax deferral by taking distributions over a potentially even longer period of time.

"This is complicated," says George to his financial consultant. "We want to be sure we haven't overlooked anything and that we're making the best move for us and our family. At the same time, this appears to be a tremendous opportunity to pass on wealth to future generations."

Have you determined how your retirement accounts fit into your overall estate plan? Consider discussing this topic with your financial advisor.

© 2010 Standard & Poor's Financial Communications. All rights reserved.

Three Types of People to Fire Immediately

We often teach our children to work hard and never, ever give up. We teach them to be grateful, to be full of wonder, to expect good things to happen, and to search for literal and figurative treasure on every beach, in every room, and in every person.

But some day, when the treasure hunt is over, a good lesson may also be to teach them to fire people. Why? After working with the most inventive people in the world for two decades, G. Michael Maddock and Raphael Louis Vitón have discovered the value of a certain item in the leadership toolbox: the pink slip.

Show of hands: How many of you out there in Innovationland have gotten the “what took you so long?” question from your staff when you finally said goodbye to a teammate who was seemingly always part of problems instead of solutions?

We imagine a whole bunch of hands. (Yep, ours went up, too.)

These people—and we’re going to talk about three specific types in a minute—passive-aggressively block innovation from happening and will suck the energy out of any organization.

When confronted with any of the following three people—and you have found it impossible to change their ways, say goodbye.

1. The Victims
“Can you believe what they want us to do now? And of course we have no time to do it. I don’t get paid enough for this. The boss is clueless.”

Victims are people who see problems as occasions for persecution rather than challenges to overcome. We all play the role of victim occasionally, but for some, it has turned into a way of life. These people feel persecuted by humans, processes, and inanimate objects with equal ease—they almost seem to enjoy it. They are often angry, usually annoyed, and almost always complaining. Just when you think everything is humming along perfectly, they find something, anything, to complain about. At Halloween parties, they’re Eeyore, the gloomy, pessimistic donkey from the Winnie the Pooh stories—regardless of the costume they choose.

Victims aren’t looking for opportunities; they are looking for problems. Victims can’t innovate.

So if you want an innovative team, you simply can’t include victims. Fire the victims. (Note to the HR department: Victims are also the most likely to feel the company has maliciously terminated them regardless of cause. They will often go looking for someone—anyone—who will agree that you have treated them unjustly. Lawyers are often left to play this role. So have your documentation in order before you let victims go, because chances are you will hear from their attorneys.)

2. The Nonbelievers
“Why should we work so hard on this? Even if we come up with a good idea, the boss will probably kill it. If she doesn’t, the market will. I’ve seen this a hundred times before.”

We love the Henry Ford quote: “If you think you can or think you cannot, you are correct.” The difference between the winning team that makes industry-changing innovation happen and the losing one that comes up short is a lack of willpower. Said differently, the winners really believed they could do it, while the losers doubted it was possible.

In our experience, we’ve found the link between believing and succeeding incredibly powerful and real. Great leaders understand this. They find and promote believers within their organizations. They also understand the cancerous effect that nonbelievers have on a team and will cut them out of the organization quickly and without regret.

If you are a leader who says your mission is to innovate, but you have a staff that houses nonbelievers, you are either a lousy leader or in denial. Which is it? You deserve the staff you get. Terminate the nonbelievers.

3. The Know-It-Alls
“You people obviously don’t understand the business we are in. The regulations will not allow an idea like this, and our stakeholders won’t embrace it. Don’t even get me started on our IT infrastructure’s inability to support it. And then there is the problem of ….”

The best innovators are learners, not knowers. The same can be said about innovative cultures; they are learning cultures. The leaders who have built these cultures, either through intuition or experience, know that in order to discover, they must eagerly seek out things they don’t understand and jump right into the deep end of the pool. They must fail fearlessly and quickly and then learn and share their lessons with the team. When they behave this way, they empower others around them to follow suit—and presto, a culture of discovery is born and nurtured.

In school, the one who knows the most gets the best grades, goes to the best college, and gets the best salary. On the job, the person who can figure things out the quickest is often celebrated. And unfortunately, it is often this smartest, most-seasoned employee who eventually becomes expert in using his or her knowledge to explain why things are impossible rather than possible.

This employee should be challenged, retrained, and compensated for failing forward. But if this person’s habits are too deeply ingrained to change, you must let him or her go. Otherwise, this individual will unwittingly keep your team from seeing opportunity right under your noses. The folks at Blockbuster didn’t see Netflix‘s ascendancy. The encyclopedia companies didn’t see Google coming. But the problem of expert blindness existed well before the Internet.

Two of our favorites from “This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.” —Western Union internal memo, 1876.

And “The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in particular?” —David Sarnoff’s associates in response to his urgings for investment in the radio in the 1920s.

At one point in his career, Thomas A. Edison had dozens of inventors working for him at the same time. He charged each with the task of failing forward and sharing the learning from each discovery. All of them needed to believe that they were part of something big. You want the same sort of people.

You don’t want the victims, nonbelievers, or know-it-alls. It is up to you to make sure they take their anti-innovative outlooks elsewhere.

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Cutting Work Hours Without Cutting Staff

Instead of jettisoning workers during the Great Depression, Iowa-based window maker Pella had its employees wash and rewash the windows it could not sell. These days, companies such as FedEx, Dell, and Motorola are adopting their own tactics to hold on to jobs, from hiring freezes to companywide unpaid vacations. (All have had to resort to layoffs as well.) And some are doing more than chopping pay or perks.

Vermont's Rhino Foods, which makes the cookie dough for Ben & Jerry's ice cream, recently sent 15 factory workers to nearby lip balm manufacturer Autumn Harp for a week to help it handle a holiday rush. The employees were paid by Rhino, which then invoiced its neighbor for the hours worked. President Ted Castle is looking to adopt a similar approach with salaried managers, too. "It's a lot easier to just do the layoff," says Castle. "But in the long term, it's not easier for the business."

Across the U.S., some 37% of human resources managers say they're now spending more time devising alternatives to layoffs vs. six months ago, according to a recent survey by the Society for Human Resource Management. Peter Cappelli, director of the Center for Human Resources at the Wharton School of Business, notes that a 5% salary cut costs less than a 5% layoff because there are no severance payments. Some state governments even make the decision easier with a program called WorkShare, which allows companies to reduce employees' work hours and make up the difference through unemployment benefits. "We would have had to take more draconian measures, such as more layoffs, were it not for this program," says Mel White, a vice-president at Portland (Ore.)-based Classic Exhibits, which makes displays for trade shows.

Training Existing Staff to Do More

A typical move amid hiring freezes: training existing staff to do more. Luxury Retreats, a villa rental agency in Montreal, shuffled 8 of its 75 employees from areas such as product development to sales. CEO Joe Poulin even moved his personal assistant to the accounting department. "You have to be really efficient with your resources in times like these," says Poulin. Steelmaker Nucor, meanwhile, has cut factory time for many of its 22,000 hourly employees. On the days they're not making steel joists, though, workers are paid their base salary to perform maintenance or take classes.

In China, accounting giant Ernst & Young offered its 9,000 mainland and Hong Kong employees a chance to take one month of unpaid leave during the first half of this year. About 90% of the firm's auditors have opted in. Bin Wolfe, head of human resources for the region, says the move will slash EY's payroll costs by 17%.

Some try to motivate staff even while trimming their pay. Matt Cooper, vice-president of Larkspur (Calif.) recruiting firm Accolo, asked employees to take five days of unpaid leave this quarter but won't dock paychecks until March. If big deals come through, he'll lift the pay cut. And he shaved costs by sleeping on his brother-in-law's couch during a recent business trip to New York. Instead of paying $1,500 for a week in a hotel room, Cooper spent 10% of that on dinner for the two of them and a nice bottle of wine.

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Beyond Annual Performance Reviews

Alexandra Mayzler, a business group member, worries about how to let her employees know whether they have met expectations. “Part of me is, like, you have your task, go do it. And if you don’t hear negative feedback, you’ve done a good job,’” said Ms. Mayzler, who owns Thinking Caps Tutoring. She knows that’s probably not an ideal way to motivate her staff. But she also said she was leery of providing constant positive reinforcement “like we’re in kindergarten.”

Ms. Mayzler said she had no problem giving feedback to her tutors. But she does have trouble evaluating her office staff. She gives annual reviews, but she said that by the time December rolled around, it was hard to be specific when making assessments. Because she can’t recall every little comment she might have made during the year, she said she tended to go with her gut. “I don’t know if I should have a feedback schedule,” she said.

“I give positive feedback in my huddles,” said another group member, Susan Parker, who owns the dressmaker Bari Jay. Everyone likes to be praised in front of their colleagues, and it motivates others to do better so they will be recognized similarly, she said. Bari Jay also conducts semi-annual written reviews. “Most of those are based off memory,” Ms. Parker said.

Negative feedback is given privately at Bari Jay, sometimes in the form of a write-up. At Thinking Caps Tutoring, Ms. Mayzler said, the issues are never big enough to warrant that sort of action. Still, when problems do rise, Ms. Mayzler is concerned that employees don’t take them seriously.

“If you don’t deal with the small things, they have the potential to become big things,” said Jessica Johnson, a group member who owns Johnson Security Bureau. She recommended documenting even minor issues. It will help as you try to create processes and procedures, she said, and it will make employees more accountable.

“On average, people are doing a good job,” Ms. Mayzler said. Otherwise, they wouldn’t last. “I don’t have the money to pay people for a year that stinks,” she said. But there are minor situations she could address. The problem, she said, is they become irrelevant three, six, or nine months after the fact. “I don’t want people to be surprised, but I don’t want to have quarterly reviews because then all I’m going to be doing is reviewing people,” she said.

“It is more work,” Ms. Johnson acknowledged. But if employees aren’t told when they make even a small mistake, she said, they will have less incentive to improve.

If someone does something wrong, Ms. Parker said, “deal with it in the moment.”

On the flip side, Ms. Mayzler said she realized that her employees might go weeks without hearing a word of positive reinforcement. Any encouragement they do receive may be so informal, Ms. Mayzler said, that they may not feel recognized. For example, the education coordinator has joked that she wants the company’s operations manager to move to Austin because she does such a great job of ensuring that tutors are where they need to be at the right time. “I’ll say, ‘No, she’s never leaving!’” said Ms. Mayzler. But she wonders whether such casual exchanges are enough to show her appreciation.

Ms. Parker reemphasized that she had found giving recognition during huddles effective. We’ll check back to see if that works for Ms. Mayzler, assuming she gets her huddles off the ground. In the meantime, do you have advice about offering feedback to your employees?

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How Small Businesses Are Coping with Health Insurance

Ann Gish, who designs high-end bed linens from offices in Manhattan, is just one small-business owners who is wrestling with how to provide health insurance to their employees. We speak with her here, to get a better understanding of how the 2010 health-care legislation will, or won’t, affect her small business.

THE OWNER Ann Gish, 63.

THE COMPANY Ann Gish Inc. designs and distributes luxury bed and table linens and pillows, which are sold at Bergdorf Goodman, and boutiques nationwide. In 2011, the company opened its own store in Manhattan. Excluding Ms. Gish and her husband, Ann Gish Inc. employs 10 people in the United States.

WHAT THE COMPANY PAYS The company bears the entire premium cost for its workforce, $472 a month per employee. It provides individual coverage only, but Ms. Gish said that most of her employees are either unmarried or have spouses who get insurance through their jobs. One sales manager, however, has a self-employed husband with a pre-existing condition and a child. Ms. Gish pays the employee’s premiums, and the employee pays the insurance for the rest of her family — an additional $1,300 a month. “She used her agent, we used our agent, and this was the best we could do,” Ms. Gish said. “If she could find a better deal, we’d give her the $500.” Ms. Gish said she is giving serious thought to reducing the share of employee premiums that her company pays: “I want to see what happens business-wise over the next year, and I want to see what happens when the health care reform kicks in.”

THE PLAN Ann Gish offers preferred provider organization coverage, a form of managed care that favors doctors and hospitals that are in-network. One aspect of the plan that galls Ms. Gish is that doctors must seek permission from the insurer before prescribing some treatments. However, Ms. Gish said, the plan is “non-gated,” meaning that employees don’t need permission from their primary doctor to see a specialist.

THE INSURER Currently, it’s Aetna; before that, it was Oxford. “We’ve changed either every year or every two years,” Ms. Gish said, “because they take away the policy that you have, and they give you a new one that’s more money and generally fewer benefits.” In recent years, premiums have bounced around, Ms. Gish said: $422 in 2009, $479 in 2010, back down to $443 last year, and now back up again. Meanwhile, she said, this year employees face slightly higher co-payments and much steeper deductibles.

THE HEADACHE Pounding and relentless. Even simple tasks, she said, like adding or removing employees from the rolls, are complicated: “My husband, who does all of the C.F.O. stuff, has spent hours and hours and hours on this. And I spend a couple days a year on it. And I’m not stupid. I’ve started a successful business.”

WHAT DIFFERENCE THE OVERHAUL HAS MADE SO FAR None. She looked into the health care tax credit available to small businesses under the law but found that the average wages her company pays exceed the law’s $50,000 threshold for the credit.

WHAT SHE WANTS FROM REFORM Simplification. Health insurance, Ms. Gish said, “should be put together in a way that any idiot could understand.” Though Ms. Gish has occasionally read press accounts of how the Affordable Care Act will change insurance, she concedes that she still does not know what to expect. “I figure when 2014  comes, I’ll have to learn it,” she said. “But since I feel pretty powerless about doing anything, and since it could all change before then, what’s the point in trying to sink your teeth into it now?”

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