Softening filters have been around even before Photoshop and digital cameras - funny how sometimes we think of Photoshop when we think of "filter", while in actual fact they of course refer to the traditional screw-in little glass people put in front of their lenses to achieve a certain effect. The softening filter does what its name imply: It softens the appearance of the subject - it's not exactly blurred, only softened.
In Photoshop, there are plenty of ways to achieve this. The easiest one: Duplicate the Layer, Select Filter>Blur>Gaussian Blur, select a value of your choice, apply, then reduce the layer opacity. But this, although fast, is not always too great. I needed something that gives me bit more control. So, I came up with the following procedure. There are more than one ways to the final result, I don't claim this is the only one.
Here's what the filter does (click to enlarge, and notice how the area around the eyes is less softened than the hair, for example):
1. Open your file and duplicate the layer (CTRL+J). Then Filter>Blur>Gaussian Blur, and select a value between 2-5, according to taste (of course, feel free to experiment with other values as well)
2. Set the layer blending mode to "Difference", and its opacity at 50%. Hit CTRL+SHIFT+ALT+E to stamp the layers. Then, select the entire image (CTRL+A). After that, you can delete both the stamped layer and the 2nd layer - whose blending mode is set to "Difference". Now you're left with your original layer.
3. Go to the channels tab, and create an alpha (custom) channel (hit the new channel icon at the bottom of the channels palette). Paste (CTRL+V). Now, go to Levels Adjustment (CTRL+L) and increase the contrast. Experiment, keeping in mind that the black area is where the softening effect will be most intense.
4. Click on the RGB channel tab, so that the image gets back its color, then go back to the layers tab. Now, go to Select>Load Selection, and pick as channel the channel you just modified (Alpha 1). Tick the "Invert" box.
5. Apply Filter>Blur>Gaussian blur (a value of your choice, but typically the same as before, 2-5). Hit CTLR+D to remove the selection, and you're set.
Optional hint for extra control:
After step 4., on the layers palette, drag and drop the layer on the "New Layer" icon, to duplicate it. Then, hit the new mask icon, and you will have a mask made out of your selection. Click on the layer (because now the mask is selected), and then go to step 5. to apply the gaussian blur filter (no selection to be removed now). Afterwards, you can finetune using the mask.