What Is Assemble-to-Order (ATO)?

Assemble-to-order (ATO) is a business production strategy where products that are ordered by customers are produced quickly and are customizable to a certain extent. It typically requires that the basic parts of the product are already manufactured but not yet assembled. Once an order is received, the parts are assembled quickly and the final product is sent to the customer.

Understanding Assemble-to-Order (ATO)

The assemble-to-order strategy is a hybrid between the make-to-stock strategy (MTS) and the make-to-order strategy (MTO). A make-to-stock strategy is one where products are fully produced in advance. The idea is to build an inventory that matches expected or anticipated consumer demand. This method would consist of setting a production level, building up inventory, and then attempting to sell as much assembled product as possible. It’s used mostly for high-volume goods, consumables, and items that can be bought in bulk or as a single unit.

A make-to-order strategy is one where products are manufactured once the order has been received. Production is driven by demand and items are only produced when orders are confirmed. In other words, the supply chain operation does not begin until there is evidence of sufficient customer demand. This strategy is often employed for high-end goods or items made individually or in small batches.

The ATO strategy attempts to combine the benefits of both make-to-order and make-to-stock—getting products into customers’ hands quickly while allowing for the product to be adapted or altered in certain ways, as per customer request. In most cases, the time and costs associated with building the product from its components are minimal. However, the time and costs to build the components, which are usually ordered from a supplier, can be considerable.

Enabled by technology, advancements in production processes and inventory management systems have played a big part in making assemble-to-order strategies a reality. Add cheaper methods of shipping products, and the strategy has been a boon for product customization opportunities.

Pros and Cons Assemble-to-Order (ATO)

Like many methods that chart a middle course, assemble-to-order has both advantages and disadvantages.

Example of Assemble-to-Order (ATO)

Consider a manufacturer of personal computers. It might have all of the essential parts of a computer—motherboards, graphic cards, processors, monitors, keyboards—in stock and already manufactured. The company depends on various suppliers for these components.

When orders for new PCs arrive, it is easy for the company to assemble and customize the computers using the various components. The process is driven by customer demand, however, and until the order arrives, the components sit on shelves.

What Is Administrative Services Only (ASO)?

Administrative services only (ASO) refers to an agreement that companies use when they fund their employee benefit plan but hire an outside vendor to administer it. For example, an organization may hire an insurance company to evaluate and process claims under its employee health plan while maintaining the responsibility of paying the claims itself. An ASO arrangement contrasts with a company that purchases health insurance for its employees from an external provider.

Understanding Administrative Services Only (ASO)

Plan specifics for administrative services only (ASO) vary depending on the agreement a company establishes with insurance companies and third-party administrators (TPA). In ASO arrangements, the insurance company provides little to no insurance protection, which is in contrast to a fully insured plan sold to the employer.

As such, an ASO plan is a type of self-insured or self-funded plan. The employer takes full responsibility for claims made to the plan. For this reason, many employers using ASO plans also establish aggregate stop-loss policies in which the insurance company takes responsibility for paying claims that exceed a certain level—for example, $10,000 per insured person in exchange for a premium.

ASO insurance plans typically cover short-term disability, health, and dental benefits. Occasionally, they cover long-term disability for larger employers. ASO services are gaining popularity as many employers, particularly larger ones, explore the potential financial advantages that this type of plan can provide. An ASO may allow an employer to take greater control of benefit costs to meet the organization’s needs. However, ASO arrangements may not be suitable for all companies, and they come with certain risks. 

Traditional Administrator vs. Administrative Services Only (ASO)

A traditional administrator agreement is an arrangement whereby an insurance company fully administers claims. The insurance company is responsible for the services to maintain and manage plans, including making decisions on and covering the costs of claims.

Alternatively, under the ASO, the insurance company only provides administrative services for plans. The insurer serves as a third-party administrator to the employer, who assumes the duty to cover claim costs.

Under the traditional administrator agreement, premiums are fixed and reviewed annually. This arrangement makes it difficult for employers to know the impact of claims until premiums are assessed for the next year. With ASO arrangements, employers can, in real-time, keep track of fluctuating costs and plan accordingly.

Considering costs, when they exceed what was expected, premiums increase the following year with the traditional administrator. If costs are less than expected, the surplus remains with the insurance company. On the other hand, with an ASO agreement, the surplus is reinvested with the employer.

Advantages and Disadvantages of Administrative Services Only (ASO)

The costs for fully insured plans depend on an insurer’s evaluation of anticipated claims for a given year. For an ASO, however, annual funding levels are based on actual paid claims. If there are fewer claims than anticipated, then employers keep the surplus and reinvest the reserves. The surplus can translate into employers offering additional benefits, many of which would not be ordinarily covered by conventional health plans.

The total costs for an ASO are typically lower than those for a traditional administrator as the employer pays a negotiated fee to the third party rather than salaries and benefits to dedicated staff. These cost savings can offset rises in claims and be used to help the company grow. Alternatively, if claims consistently exceed forecasts, the cost for ASO may exceed that of a traditional administrator plan.

On the other hand, employers would be responsible for any deficit if claims exceed budgeted amounts. Catastrophic claims or sudden and unexpected events are of particular concern as they can exceed projected budgets and erode profits. Employers often invest in a stop-loss insurance policy to provide an additional level of protection in the event of these cases.

In some cases, an ASO arrangement may not be suitable for life insurance and extended healthcare benefits. Employers need to weigh the risks and benefits of how different ASO arrangements might affect their organizations.

Administrative Services Only FAQs

What Is a Recommended Stop Loss Level for an ASO Plan?

A common stop loss level for an ASO plan is $10,000 per eligible employee.

Is Self-Funded Healthcare the Same as Administrative Services Only?

Self-funded healthcare and administrative services only (ASO) are the same. These terms indicate an insurance arrangement in which the employer or organization assumes full responsibility for the cost of covered claims.

Who Keeps the Profits in Fully Insured Coverage?

Under a fully insured plan, the insurance company retains profits.

What Is an Amortizable Bond Premium?

The amortizable bond premium is a tax term that refers to the excess price paid for a bond over and above its face value. Depending on the type of bond, the premium can be tax-deductible and amortized over the life of the bond on a pro-rata basis.

Understanding an Amortizable Bond Premium

A bond premium occurs when the price of the bond has increased in the secondary market due to a drop in market interest rates. A bond sold at a premium to par has a market price that is above the face value amount.

The difference between the bond’s current price (or carrying value) and the bond’s face value is the premium of the bond. For example, a bond that has a face value of $1,000 but is sold for $1,050 has a $50 premium. Over time, as the bond premium approaches maturity, the value of the bond falls until it is at par on the maturity date. The gradual decrease in the value of the bond is called amortization.

Cost Basis

For a bond investor, the premium paid for a bond represents part of the cost basis of the bond, which is important for tax purposes. If the bond pays taxable interest, the bondholder can choose to amortize the premium—that is, use a part of the premium to reduce the amount of interest income included for taxes.

Those who invest in taxable premium bonds typically benefit from amortizing the premium, because the amount amortized can be used to offset the interest income from the bond. This, in turn, will reduce the amount of taxable income the bond generates, and thus any income tax due on it as well. The cost basis of the taxable bond is reduced by the amount of premium amortized each year.

In a case where the bond pays tax-exempt interest, the bond investor must amortize the bond premium. Although this amortized amount is not deductible in determining taxable income, the taxpayer must reduce their basis in the bond by the amortization for the year. The IRS requires that the constant yield method be used to amortize a bond premium every year.

Amortizing Bond Premium With the Constant Yield Method

The constant yield method is used to determine the bond premium amortization for each accrual period. It amortizes a bond premium by multiplying the adjusted basis by the yield at issuance and then subtracting the coupon interest. Or in formula form:

• Accrual = Purchase Basis x (YTM /Accrual periods per year) – Coupon Interest

The first step in calculating the premium amortization is to determine the yield to maturity (YTM), which is the discount rate that equates the present value of all remaining payments to be made on the bond to the basis in the bond.

For example, consider an investor that purchased a bond for $10,150. The bond has a five-year maturity date and a par value of $10,000. It pays a 5% coupon rate semi-annually and has a yield to maturity of 3.5%. Let’s calculate the amortization for the first period and second period.

The First Period

Since this bond makes semi-annual payments, the first period is the first six months after which the first coupon payment is made; the second period is the next six months, after which the investor receives the second coupon payment, and so on. Since we’re assuming a six-month accrual period, the yield and coupon rate will be divided by 2.

Following our example, the yield used to amortize the bond premium is 3.5%/2 = 1.75%, and the coupon payment per period is 5% / 2 x $10,000 = $250. The amortization for period 1 is as follows:

• Accrual_period1 = ($10,150 x 1.75%) – $250
• Accrual_period1 = $177.63 – $250
• Accrual_period1 = -$72.38

The Second Period

The bond’s basis for the second period is the purchase price plus the accrual in the first period—that is, $10,150 – $72.38 = $10,077.62:

• Accrual_period2 = ($10,077.62 x 1.75%) – $250
• Accrual_period2 = $176.36 – $250
• Accrual_period2 = -$73.64

For the remaining eight periods (there are 10 accrual or payment periods for a semi-annual bond with a maturity of five years), use the same structure presented above to calculate the amortizable bond premium.

Intrinsically, a bond purchased at a premium has a negative accrual; in other words, the basis amortizes.

What Is an Alternative Investment?

An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Alternative investments can include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is also often classified as an alternative investment.

Understanding Alternative Investments

Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, lack of regulation, and degree of risk. Many alternative investments have high minimum investments and fee structures, especially when compared to mutual funds and exchange-traded funds (ETFs). These investments also have less opportunity to publish verifiable performance data and advertise to potential investors. Although alternative assets may have high initial minimums and upfront investment fees, transaction costs are typically lower than those of conventional assets due to lower levels of turnover.

Most alternative assets are fairly illiquid, especially compared to their conventional counterparts. For example, investors are likely to find it considerably more difficult to sell an 80-year old bottle of wine compared to 1,000 shares of Apple Inc. due to a limited number of buyers. Investors may have difficulty even valuing alternative investments, since the assets, and transactions involving them, are often rare. For example, a seller of a 1933 Saint-Gaudens Double Eagle $20 gold coin may have difficulty determining its value, as there are only 13 known to exist and only one can be legally owned.

Regulation of Alternative Investments

Even when they don’t involve unique items like coins or art, alternative investments are prone to investment scams and fraud due to the lack of regulations.

Alternative investments are often subject to a less clear legal structure than conventional investments. They do fall under the purview of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and their practices are subject to examination by the U.S. Securities and Exchange Commission (SEC). However, they usually don’t have to register with the SEC. As such, they are not overseen or regulated by the SEC as are mutual funds and ETFs.

So, it is essential that investors conduct extensive due diligence when considering alternative investments. In some cases, only accredited investors may invest in alternative offerings. Accredited investors are those with a net worth exceeding $1 million—not counting their primary residence—or with an annual income of at least $200,000 (or $300,000 combined with a spousal income). Financial professionals who hold a FINRA Series 7, 65, or 82 license may also qualify as an accredited investor.

Strategy for Alternative Investments

Alternative investments typically have a low correlation with those in standard asset classes. This low correlation means they often move counter to the stock and bond markets. This feature makes them a suitable tool for portfolio diversification. Investments in hard assets, such as gold, oil, and real property, also provide an effective hedge against inflation, which hurts the purchasing power of paper money.

Because of this, many large institutional funds such as pension funds and private endowments often allocate a small portion of their portfolios—typically less than 10%—to alternative investments such as hedge funds.

The non-accredited retail investor also has access to alternative investments. Alternative mutual funds and exchange-traded funds—also called alt funds or liquid alts—are now available. These alt funds provide ample opportunity to invest in alternative asset categories, previously difficult and costly for the average individual to access. Because they are publicly traded, alt funds are SEC-registered and regulated, specifically by the Investment Company Act of 1940.

Example of Alternative Investments

Just being regulated does not mean that alt funds are safe investments. The SEC notes, “Many alternative mutual funds have limited performance histories.”

Also, although its diversified portfolio naturally mitigates the threat of loss, an alt fund is still subject to the inherent risks of its underlying assets. Indeed, the track record of ETFs that specialize in alternative assets has been mixed.

For example, as of January 2022, the SPDR Dow Jones Global Real Estate ETF had an annualized five-year return of 6.17%. In contrast, the SPDR S&P Oil & Gas Exploration & Production ETF posted a return of –6.40% for the same period.