Next month is open enrollment for University of Illinois health plans, and employees will have an opportunity to reevaluate which plan is best for them and their families. The goal is to strike a balance between managing out-of-pocket costs and optimizing financial benefits. How do you do that? We give you some factors to consider.
To be or not to be, that is the question. A binary choice. In the past, a SURS Self-Managed Plan (SMP) participant once had a binary choice like this. Annuitize or not annuitize. Annuitization would ensure a lifetime stream of income and the retiree health insurance. By not annuitizing, or taking the lump sum option, one was turning down the health insurance and assuming the risk of portfolio management.
Along with the rebranding of the SMP to the SURS Retirement Savings Plan (RSP), more choices were added. With more choices comes more complexity. Participants may still choose to annuitize the lump sum as they have in the past. Alternatively, one may choose to use the new Secure Income Portfolio (SIP). Some of the new benefits SIP affords are:
1) the potential to have one’s retirement income stream increase with market returns, and
2) the ability to leave the residual value of one’s SURS account to heirs at death.
Along with these new choices come more options. One new choice is the ability to only use half of the account to produce guaranteed income and still maintain state-provided health insurance. This ability provides guaranteed income through the Secure Income Portfolio (“SIP”). The remaining 50% would be kept in the Lifetime Income Strategy (“LIS”) and can be accessed as needed.
To review a more comprehensive explanation and analysis of the new RSP, you can download a whitepaper we authored here.
As we have begun to assist clients through the retirement process since the change from SMP to the new RSP Plan, here are a few items we have learned along the way.
There are different rules for participants retiring before age 60 when using the SIP.
If you choose to have some balance remain in LIS and not be subject to the guaranteed payout through the SIP, you can’t access the amount in the LIS until you turn age 60. One benefit of using the SIP is that you can choose to only use half the account for generating pension income and still qualify for the health insurance benefit. After age 60, the other half – the LIS half – can be used or withdrawn as desired. However, prior to age 60 that freedom to withdraw the account does not apply.
If you retire before age 60, your SIP benefit cannot yet increase with market increases – it is “locked” until age 60. Just like at age 60 and later retirement, the benefit amount may not go down. The “floor” is set at retirement. Once one reaches age 60, benefit increases due to market gains can be granted. If market decreases do happen between retirement and age 60, the principle in the LIS account is reduced even though the benefit is not.
The benefit of using the SIP includes:
• ability to allocate a portion of your account balance to draw upon at your discretion
• ability to leave the leftover balance of your account to a beneficiary and heirs at death
• ability for guaranteed income to increase overtime with the performance of investments
However, these benefits come with an expense – you could potentially receive a smaller pension relative to other options.
The pension amount can be expressed as a withdrawal rate, which is the annual benefit divided by the total lump sum balance. For example, a pension benefit of $5,000 per month or $60,000 per year on a $1 million account balance equates to a withdrawal rate of 6%. When activating the SIP, or annuitizing your balance, rates will depend on a variety of factors including, but not limited to: age, whether a survivor benefit is being provided, and market rates at retirement.
Under recent rates, if one is age 65 with no survivor benefit and annuitizes the account (without using the SIP), a withdrawal rate of 7.4% could be expected.¹ If the same individual uses the SIP they could expect a withdrawal rate of 4.81%.² In real dollar terms in this example, with a $1,000,000 balance, it would mean the difference between receiving $6,183 per month and $4,008 per month.
In this example, the monthly pension benefit is only 65% of what it might have been had the account been fully annuitized. One might think “I worked hard all these years and this is all I get?” Keep in mind, you are giving up some monthly benefit in order to potentially get future rate increases, and to preserve that value for heirs.
While most assets were transferred to Voya during the changeover to RSP, some legacy funds may still exist at TIAA or Fidelity. At retirement, remaining balances in TIAA or Fidelity need to be annuitized with that company or transferred to Voya and incorporated into the SIP. One of these two actions are mandatory to qualify for and enroll in the SURS health insurance benefit. This would apply even if the TIAA balance is extremely small and would not produce much monthly income.
Once your lifetime benefit in the LIS Secure Income Portfolio is “activated,”³ there’s no going back. One cannot later terminate the contract and take the entire LIS and SIP balance for one’s own. This might apply if you are an early retiree (before Medicare age 65) and need the SURS health insurance. Before 65 the health benefit is large but diminishes following enrollment in Medicare. At 65, if you were to want to terminate enrollment, and take the lump sum balances for one’s own management and quit paying the higher fees for benefits you’re no longer using, the rules would prevent enacting this strategy.
[1] Principal Life Insurance Company Illustrative Table of Annuity Premiums for SURS Rates as of October 1, 2022
[2] Chart – SURS Blended Rates- Rolling Periods, Lifetime Income Strategy – Q4 2022
[3] SURS Retirement Savings Plan Member Guide, page 22, https://surs.org/wp-content/uploads/Guide-RSP.pdf
We have heard from many of our clients regarding concerns over the change in Insurance Providers for State of Illinois Medicare-Eligible Retirees. With so many clients impacted by this change, we have been following the news. Here is what we know so far and what we are recommending.
Starting with what we know, it is not much. We wrote up a short piece on our website on this a few weeks back, which you can read here. The major concern at this time is that Carle has not come to an agreement with the Advantage Plan Provider, Aetna. This means that Carle providers and facilities are not in-network for the new plan effective January 1, 2023. While the new plan is a PPO and should allow you to see out-of-network doctors, these services may not be covered if the provider is unwilling to bill through Aetna.
As far as we can tell, conversations between Carle and Aetna are ongoing and there is a possibility that an agreement will be reached before the new plan year. This would not be unprecedented. A similar process unfolded about 10 years ago when Health Alliance was dropped in favor of UnitedHealthcare. Recent comments from Carle and Aetna representatives may be more attempts to rally public pressure for negotiations than statements of actual status of negotiations.
The unfortunate part is this leaves a lot of uncertainty for current plan participants. Here is what we are recommending:
If you are currently undergoing treatment for chronic or critical medical issues and absolutely cannot switch doctors, be prepared to switch to a private policy:
November 30th – Deadline to opt out of the TRAIL / State of Illinois Medicare Plan
December 7th – Deadline for Medicare Open Enrollment to select your own private plan
Research Alternative Plans - Medicare's Website is the best resource as you can narrow in to providers covered in your area.
Private policies generally run $50-175/month/person, but can be higher or lower depending on deductible, co-pays, etc.
Inputting your current prescriptions will provide you a better total out of pocket cost estimate.
Pay attention to vision and dental coverage.
For everyone else, it is probably best to take a wait-and-see approach. If Carle and Aetna reach an eleventh hour agreement, you avoid all the hassle of unenrolling and reenrolling from TRAIL next year. If they do not reach an agreement, you could also unenroll from TRAIL during the next enrollment period near the end of 2023.
In September, the State of Illinois Department of Central Management Services (CMS) announced changes to the State of Illinois Retiree Insurance Program. These changes impact retirees enrolled in the Total Retiree Advantage Illinois (TRAIL) who are also Medicare Eligible. This applies to members who are currently enrolled, or plan to enroll in the TRAIL Medicare Advantage Prescription Drug (MAPD) plan effective for the 2023 plan year.
Following a proposal process, the State of Illinois has selected Aetna Medicare Advantage Prescription Drug (MAPD) PPO Plan as the new medical and prescription drug plan beginning January 1, 2023. This will replace the existing plans, most commonly the HMO Plans through UnitedHealthcare, Health Alliance, or Humana. This change is automatic and does not require participants to take any action .
Here are a few Frequently Asked Questions (FAQs) that may help you:
The contract with current providers expires December 31, 2022. State law requires a competitive process to compare proposals submitted by various vendors. Aetna was selected as part of this process.
With any change in insurance provider also comes concern over coverage of existing doctors and hospitals. While it is yet to be seen how these concerns will be addressed, it is worth noting this is not a new process. A similar process unfolded when Health Alliance was dropped in exchange for UnitedHealthcare.
No. To maintain coverage under the Total Retiree Advantage Illinois (TRAIL), including subsidized premiums under your retirement annuity, you and your dependents will automatically change to the new provider.
You may opt of out of TRAIL by visiting MyBenefits.illinois.gov. This must be completed by November 30, 2022. If you opt out, you will want to select a new Medicare Supplement and Part D or Medicare Advantage plan in the private market. You will be responsible for the full premiums for these Supplement/Advantage plans. You can compare plans at Medicare's Website. If you opt out, you may re-enroll in the TRAIL program with a qualified life event or during the next year’s open enrollment.
This change only impacts members and their dependents whose coverage is under a Medicare Advantage plan. If you or any dependents are not Medicare-eligible, your coverage is through the State Employees Group Insurance Program (SEGIP) and is not impacted by this change. This change may impact you if you become Medicare eligible in the future.
Medicare is commonly made up of three parts:
Part A – Covers Hospital Services
Part B – Medical Insurance
Part D – Prescription Drugs
Most Medicare participants also add a Medicare Supplement plan to cover any gaps and add services above the base Medicare plans.
Medicare Advantage Plans combine all the above plans into a single plan, administered through a private health insurance company. In this case, Aetna is the private company who will take over administration.
Yes. While a Medicare Advantage plan replaces original Medicare, you are still responsible for Medicare Part B premiums, which are either paid directly to Medicare or deducted from Social Security benefits. Note that, for most people, Medicare Part A is free (paid through Payroll taxes while working). Your Part B premium is based on your income and can change from year to year. Part D may also have a supplemental cost. These premium adjustments are called the Income Related Monthly Adjustment Amounts (IRMAA) as follows:
As mentioned previously, for those opting out, actions will need to be taken. For those choosing to stay on the TRAIL MAPD program, the change is automatic for members and their dependents. You will receive a welcome kit in the mail from Aetna with more information on the plan and new member ID Cards. With all the Medicare spam mail that gets sent out, keep a sharp eye out for any correspondence from AETNA, CMS, or anything with the TRAIL logo.
SURS News Release Retiree Healthcare Update - SURS
Illinois Central Management Services My Benefits Website
Aetna Coverage Details State of Illinois | Aetna Medicare
Medicare Premiums Detail at Social Security - IRMAA Sliding Scale Tables
TRAIL Enrollment Guide (2022) FY 2022 Benefit Choice
Selecting the right Pension Plan under SURS is complex. Below are some of the factors we discuss and a summary of how they may impact your decision:
|
|
Traditional Plan |
Portable Plan |
Retirement Savings Plan |
|
High-income Participants |
Less Favorable |
Less Favorable |
More Favorable |
|
Participant Control of Investments |
No |
No |
Yes |
|
Pension Income Guaranteed |
Yes |
Yes |
No |
|
Career Stage |
Favors Late-Career |
Favors Late-Career |
Favors Early-Career |
|
Flexible Options at Retirement |
Least |
Moderate |
Most |
Congratulations on your new role with an Illinois public institution! In addition to meeting your new colleagues, learning the ropes of your new department, and developing your new courses (if instructing), you will need to select a pension plan under the options offered through the State Universities Retirement System (SURS). Choosing the right plan can be complex, so we have narrowed down the factors we have found make the biggest difference.
We encourage you to be diligent in your selection process, but do not delay! While you have 6 months to select a plan, matching contributions are not allocated to the self-directed plan until you decide. If you fail to decide, you will automatically be enrolled into the default option of the Traditional Plan.
So, let’s get started!
When you begin employment, you must select from three plan offerings: Traditional, Portable, or Retirement Savings Plan (hereafter referred to as RSP). The RSP was previously known as the Self-Managed Plan (SMP) until it was updated and rebranded in 2021. You may find that some colleagues still refer to it as such.
While all three plans are considered pension plans, they can be distinguished at a high level between defined benefit and defined contribution plans. In a defined benefit pension plan, your retirement income is based on a formula. The Traditional and Portable plans fall under this category. In this case, your income at retirement is determined by your average earnings and length of service. The pool of money that backs this pension is managed by SURS and the investment risk is borne by the State of Illinois.
In contrast, the RSP is a defined contribution plan. Your future retirement income is based on the balance of your account at retirement. Your contributions along with matching contributions from the state are deposited into a separate account for your benefit. You are responsible for selecting and managing the investments in that account and bear the investment risk of that account. When you retire, you can convert that account balance into a stream of income called an annuity. The level of this benefit will be determined by the balance of your account at retirement. You can read about these annuity options in the white paper we wrote about this plan by clicking here.
|
Options |
Plan Type |
Summary |
|
Traditional Plan Portable Plan |
Defined Benefit |
Retirement benefit based on formula Employer bears investment risk |
|
Retirement Savings Plan |
Defined Contribution |
Retirement benefit based on account balance
You bear investment responsibility and risk |
One major difference in the plans is the level of income counted towards your pension benefits. Due to this difference, salary and future growth potential could be the single biggest factors to consider in selecting your plan.
The Traditional and Portable plans are limited to a state-determined Maximum Pensionable Earnings, currently $116,470.42 (Fiscal Year 2022). If your salary exceeds this limit, your contributions to the plan (8% of salary) and employer matching contributions (7.6% of salary) will only be based on your wages up to the limit. Similarly, your final average salary to determine your annual pension will be capped based upon this same limit.
The RSP uses a federal limit for Maximum Pensionable Earnings, currently $290,000 (Fiscal Year 2022). This makes the RSP more favorable to those whose current or future salary may exceed the annual Traditional and Portable annual wage limit. To illustrate, consider the following examples.
Dr. Zhao has been recruited by the University of Illinois as a Professor and a starting salary $200,000 per year. She selects the SURS Traditional Plan. She works for 25 years, retiring at age 67. Her pension is $64,000/year[i] or $5,333/month.
Let’s assume the same base facts as example 1, except Dr. Zhao selects the RSP plan. She invests her RSP Account Balance into a portfolio of 40% Bonds and 60% Stocks, earning an annualized return of 9.4% per year[ii]. At age 67, she retires with a SURS RSP Balance of $2.8 million. She then annuitizes this balance and receives a lifetime income stream of $142,000/year or $11,833/month[iii].
There is a crucial difference between Examples 1 and 2. As an employee, your contribution to SURS ends after your income exceeds the Maximum Pensionable Earnings. Consider the following table to illustrate:
|
Plan |
Maximum Pensionable Earnings |
Contributions Assuming $200,000 Salary |
|
Traditional Plan Portable Plan |
$116,470.42 |
Employer: amount required annually based on actuarial formula
Employee: $116,470.42 x 8% = $9,317.63 |
|
Retirement Savings Plan |
$290,000.00 |
Employer: $200,000 x 7.6% = $15,200
Employee: $200,000 x 8% = $16,000 |
This means Dr. Zhao would contribute over $6,682.37 ($16,000 - 9,317.63) more per year to the SURS RSP than the SURS Traditional Plan.
Assume the same facts as Example 1, except Dr. Zhao chooses to add the $6,682.37/year to a supplemental retirement savings plan (403b). We will also assume the same hypothetical portfolio used in Example 2. At the end of 25 years, she has an account balance of about $600,000. Assuming the same annuity rates as Example 2, she could receive an estimated additional income of $30,000/year, or $2,500/month, from her 403b account.
Together, these three examples illustrate the impact the salary cap has on the outcome. For someone whose income exceeds the salary cap, selecting the Traditional or Portable plan results in the missed opportunity to receive matching contributions.
For those who choose the RSP, one feature of the plan is the ability to control investment decisions. Voya is the current plan custodian. Through their platform you can allocate your account balance between a mix of different investment choices. One option is to select a custom mix of Core Funds. Core Funds are a set of low-cost, index funds designed to track a variety of investment benchmarks. Participants can choose a custom combination of Core Funds in proportions that they deem most appropriate for their situation, but are self-responsible for managing the balances between the Core Funds over time. An alternative to the Core Funds is the Lifetime Income Strategy (LIS) Fund. The LIS is an investment fund that is managed to automatically adjust the risk level of the fund based on your planned retirement date.
As illustrated in the above examples, choosing the RSP provides participants with the potential for maximizing pension payments in retirement. However, the downside is that you also bear the investment risk that comes along with your investment selections, which, depending on market and investment performance, can directly impact the future balance of the RSP and thus, the size of the pension payments which can be generated by that RSP balance.
If you prefer to have the employer retain the investment risk and receive a guaranteed income, then the Traditional or Portable may be a more suitable option. These plans are professionally managed by the investment staff with SURS. No matter the outcome of investment performance, your ultimate pension benefit is guaranteed.
While investment returns in the future cannot be predicted based on past performance, historical data generally shows more favorable returns for those who are invested for a long period of time[iv]. This suggests someone entering employment earlier in their career could benefit from a long period of time to allow investments to compound and grow in value, which may favor the Retirement Savings Plan.
Someone nearing the end of their career may not have a long-time horizon to ride out the ups and down of investment performance. In that case, a new employee in their later working years may favor enrolling in the Traditional or Portable plan.
The trend has been toward a more mobile workforce, where multiple job changes throughout one’s career are not uncommon. Academia is not immune to this trend. Therefore, you should consider the flexibility and portability of benefits in the event of an employment change. Here is a summary:
The Traditional plan has the least flexibility for departure or refund.
Requires 10-years of service credit to vest.
If you are fully vested and leave SURS-covered employment, you can:
Wait and draw benefits at full retirement age, or
Take a refund of your own contributions plus interest. Employer matching contributions are forfeited with this choice.
If you are not yet vested and leave SURS-covered employment, you are only entitled to a refund of your own contributions. Employer contributions are forfeited unless you later vest.
The Portable plan offers some benefits of the defined-benefit plan while maintaining some flexibility in case of departure.
Requires 10-years of service credit to vest.
If you are fully vested and leave SURS-covered employment, you can:
Wait and draw benefits at full retirement age, or
Take a refund of your contributions, employer matching contributions, plus interest.
If you are not yet vested and leave SURS-covered employment, you are only entitled to a refund of your own contributions. Employer contributions and interest are also refundable after 5 years of service credit.
The Retirement Savings Plan offers the most flexibility.
You vest with 5 years of service credit.
If you are fully vested and leave SURS-covered employment, you can take a refund of your contributions, the employer contributions, and growth and interest of the account.
If you are not fully vested and leave SURS-covered employment, you can take a refund of your contributions and growth and interest of the account. Employer contributions are forfeited.
For all plans, eligibility for retiree health insurance requires you to fully vest. Taking the full refund option for any pension will forfeit retiree health insurance benefits.
In exchange for reduced flexibility, the Traditional plan offers the most generous survivor benefits. Survivors would receive 2/3rds of your accrued monthly retirement benefit, payable to your eligible survivor. This benefit comes at no extra cost to you.
Following the same facts as example 1, assume that Dr. Zhao had selected the SURS Traditional pension with a base benefit of $5,333/month. If she were to die shortly after retiring, her spouse would be entitled to a survivor benefit of $3,555/month for life. At the death of Dr. Zhao and her spouse, no additional survivor benefits would be payable to children or other heirs.
The Portable plan only offers a default survivor benefit if you die before reaching retirement. In that case, the benefit is 50% of your accrued retirement benefit (as compared to 2/3rds under the Traditional plan). Upon retirement, you can choose to purchase a survivor benefit greater than 50% at a cost to you of reduced lifetime payments.
Following the same facts as example 1, assume that Dr. Zhao had selected the SURS Portable pension with a base benefit of $5,333/month. If she were to die shortly after retiring, her spouse would not be entitled to any survivor benefit. At retirement, Dr. Zhao could instead choose to take a reduced monthly pension to add a survivor benefit for 50%, 75% or 100% of the original pension.
The RSP does not provide an automatic lifetime survivor payment. You or your survivor are always eligible for a refund of your own contributions and earnings. After 1.5 years of service, employer matching and related earnings are also refundable to survivors. Your survivor may choose a lifetime payment with this refund, with the amount of such payment based on your account balance at that time.
This guide was written for those enrolling in SURS now and are therefore in Tier II SURS plans. This applies to those enrolled on or after January 1, 2011. If you first enrolled in SURS prior to this date and are a Tier I participant, some of these plan provisions may be different.
I’ll note that many clients consider the RSP a refuge from the troubled finances of the State of Illinois. The idea is that funds are held separately, in-trust, and therefore safe from the creditors of the State. This is true. By federal law, RSP funds must be deposited in a timely manner to your account, including employer matching. State matching of the other pension plans has not always been made timely, which is a big part of the pension underfunding problem.
However, this advantage of the RSP does not make the Traditional or Portable plans “unsafe”. The Illinois constitution states that pension benefits cannot be diminished, which guarantees participants their right to future benefits. Previous attempts at pension reform have tested and found this guarantee to be true. Unlike municipalities and territories, Detroit and Puerto Rico being recent examples, a State may not go bankrupt and therefore discharge the indebtedness of pension through bankruptcy. While it is yet to be seen how the state will solve its current financial crisis, it must pay the promised bill of pensions.
Regardless of whichever plan you choose, I would also encourage you to fund additional savings beyond your mandatory pension contributions. While the SURS system does provide generous pension benefits, the pension was not designed to cover all your needs beyond working years. Additionally, depending on your work history, you may not qualify for social security benefits as you do not participate in the social security system while actively participating in SURS. Even if you have a past earnings history in social security, your social security benefits may be reduced as a result of the benefits you earned while participating in SURS. While there are many savings options out there, the 403b and 457 savings plans offered through the University are often a good place to start. We generally recommend supplemental savings of at least 7% and ideally 10% of earnings beyond your required SURS contributions.
Navigating this initial decision on retirement plan choice will have a lasting impact on your future financial security. Compounding the importance of this decision, it must be made in the flurry of other important activities of moving, starting a new job, selecting other benefits and adapting to your new role. If you need help interpreting these decisions in your own financial life or want the peace of mind that you have considered the entire picture, please let us know. Many of our clients are members or retirees of SURS. We have helped hundreds of clients through the complexities of pension decisions. If you would like our perspective or professional opinion on your own decisions, Contact Us today!
SURS Traditional - SURS Traditional Guide
SURS Portable - SURS Portable Guide
SURS Retirement Savings Plan - SURS RSP Guide
[i] Calculated using the General Formula: 2.2% x 25 Years of Service x the maximum pensionable earnings limit of $116,470.42. Result rounded to the nearest thousand for simplicity of reading. There is a second formula called Money Purchase formula based on investment returns that may result in different pension calculation. We used the General Formula because your benefit can never be less than this result.
[ii] Investment Returns based on Shea, B. (2021). Investment Returns since 1926-2021 from Ibbotson's SBBI.
[iii] Future account balance calculated on investment return as described above and is not guaranteed. Past performance does not predict future results. Annuity calculated using a 50% Joint and Survivor Annuity Rates for 65-Year-Old Annuitant and 60-Year-Old Spouse as provided by Principal Life Insurance Company, Illustrative Table of Annuity Premiums for SURS Rates as of Jan. 1, 2021
[iv] How risk, reward & time are related (2022). Vanguard. Risk, reward & compounding | Vanguard
This post was updated August 2022.
In fall of 2020, the State University Retirement System (SURS) rolled out the newly rebranded SURS Retirement Savings Plan (RSP). A revamp of the existing SURS Self-Managed Plan, these changes extended beyond a new name to include a different plan administrator, new investment option lineup, and an additional income option for retirees. We have spent the last 6+ months diving into the details of the plan and writing the following paper to present our findings.
You may download the paper below.
Executive Summary:
It is clear from our research this new plan is extremely complicated. One of the biggest changes is SURS outsourcing a major component of the plan to a third-party company, Voya. In our experience, even the SURS call center employees are not fully trained on the inner workings of the new plan or its features. In some cases, we were referred to Voya representatives to answer questions.
The paper present education and details about the new plan as follows:
An overview of retiree health insurance benefits as a SURS retiree, including under the new RSP.
A detailed analysis of the new income option for the RSP, the Secure Income Plan.
A decision tree of factors that may influence whether to utilize the Secure Income Plan vs. an Annuity.
Commentary from us regarding this change and the rollout by SURS.
Disclosures
This was written to supplement the planning decisions we make with our ongoing clients in the context of a broader financial plan. We are providing this to the general public as educational materials. We would caution any reader that the SURS plan, including this new RSP, is very complex. We could not possibly cover every possible situation or consideration in this document. You should consult other advisors regarding tax, investment, and other financial implications before making an irrevocable decision. You should not rely solely on this document for any decisions regarding your SURS plan. While we believe the information in this report to be factual, we cannot guarantee it. We did cite sources whenever facts are presented. As representatives of SURS and/or Voya would not provide full details of plan features, the paper also describes when assumptions or estimates were used.
For members of the State University Retirement System (SURS) who are thinking of retiring soon, there are more changes coming to SURS starting in the summer of 2019. Under the most recent budget signed by Governor Rauner, Illinois law was amended to allow for two new options for retirees under SURS Traditional and Portable (Tier I). Those changes are:
Voluntary Automatic Annual Increase Lump Sum – Under this option, members can elect to forgo their 3% annual pension increase for a reduced 1.5% annual increase option. Under the 3% option, annual pension increases are compounded (increase by 3% original benefit plus increases). Under the 1.5% option, future benefits are increased by simple indexing (increase by 1.5% each year of the original benefit). The first increase will also further be delayed by the later of 1 year or age 67. If elected, members would receive a lump sum equal to 70% of the actuarial value difference of the 3% benefit and 1.5% reduced benefit.
Example: $50,000 annual pension, 3% default benefit vs. option 1.5% SIMPLE increase.
Note, total benefits after 31 years of benefit are:
· $2,500,134 for 3% option
· $1,898,750 for 1.5% option
When will this choice be available? SURS expects retirees to have this option for those retiring June 1, 2019 or later. It is possible the implementation will be delayed until July 1st. This option will be available until the earlier of June 30, 2021 or until appropriated funds are exhausted.
Who does this make sense for? Most members will be better off remaining with the 3% default option. While a large lump sum may be enticing, this option was only designed to replace 70% of the benefit you forgo. This may make sense if you have a lower than average life expectancy (such as a terminal or chronic illness).
Voluntary Pension Buyout for Vested, Inactive Members – This option would allow SURS (as well as SERS and TRS) members who are vested but no longer active to elect to receive 60% of the actuarial value of their future pension benefits as a lump sum. If elected, the recipient will still be entitled to health insurance benefits.
As with the changes to the cost of living, the availability of this option is expected to start in summer of 2019 and run until the earlier June 30, 2021 or when funds are exhausted.
Final Thoughts
Members should be very thoughtful and intentional before electing to forgo future benefits. Current, and likely large, lump sums of funds may be enticing. However, in many cases, you may give up much more than you get in return. We highly recommend seeking advice and counsel before you make a decision. Contact Us if you wish to learn more about our services and how we may be able to assist.
Finally, we wrote in our blog back in 2017 about SURS rolling out a new Tier III (aka – Hybrid Plan). After SURS analyzed the requirements under the law, it was determined it will not hold up to requirements set forth under Federal Law and therefore will not be moving forward. Without further action from the Illinois legislature, no changes are anticipated in the near future. It is worth noting that there is a possibility the newest Tier II (applicable to those hired on or after January 1, 2011) may also violate those same rules and require further compensation to participants to remain in effect. As a result, there remain many unknowns, and it may take years before a resolution regarding Tier II is finalized.
Written by Karen Folk, CFP®, Ph.D., Founder & Advisor Emeritus of Bluestem Financial Advisors
Both my husband and I have been loyal clients of TIAA (formerly TIAA-CREF) for over thirty years. Throughout our academic careers, we chose TIAA over several possible providers. We were attracted to their low cost mutual funds and long nonprofit heritage of service to teachers. Founded in 1918 as the Teachers Insurance & Annuity Company to help teachers retire comfortably, they have become a leading retirement plan provider for academic, research, medical, cultural and government employees.
Recently, as an account holder, I have grown concerned by TIAA’s behavior towards us as consumers. We have noticed increasing encouragement by TIAA representatives to consolidate and rollover other retirement assets to their platform. We were notified in 2015 that TIAA had appointed a full-time representative locally. We were subsequently contacted on multiple occasions asking us to meet with this representative. After researching this individual on LinkedIn, I noted his past experience included sales roles with other large brokerage firms, but listed no Financial Planning credentials beyond the minimum required licenses.
A recent New York Times article “The Finger-Pointing at the Finance Firm TIAA” (October 21, 2017, Gretchen Morgenson), revealed some rather dramatic changes in TIAA that have led to whistleblower complaints to regulatory agencies as well as a lawsuit. The whistle-blower complaint filed with the Securities and Exchange Commission, obtained by The Times, “was filed by former TIAA employees who contend they were pressured to sell products that generated more revenue for the firm but were more costly to clients while adding little value”. This was followed by the NY Times article “TIAA Receives New York Subpoena on Sales Practices” (Nov 9, 2017). The NY state attorney general has subpoenaed records from TIAA to investigate possible regulatory infractions.
Both articles increased my concerns about whether the changes I noticed at TIAA are contrary to their long tradition of unbiased advice at low cost. As we investigated further, my husband was surprised to learn that parts of TIAA stopped being a nonprofit in 1997 – he, and I am sure many other TIAA clients, was not aware that much of TIAA is now a for-profit enterprise.
The NY Times October 21st article explains that, in 2005, TIAA established the Wealth Management Group. This group offers investment management services for a fee, a fee which is in addition to the underlying administrative and investment fees charged by TIAA funds. The lawsuit and whistleblower complaints claim that TIAA’s Wealth Management Group, now called “Individual Advisory Services”, is pushing customers into higher-cost products that generate higher fees. Given that TIAA continues to highlight its nonprofit heritage and its salaried employees, my concern is that TIAA clients are not aware of this conflict of interest.
Based on my own experience, experiences reported to us by clients, and the NY Times articles, we did some additional research we thought worth sharing.
We started by reading TIAA’s Form ADV, Part 2A, of the TIAA Advice & Planning Services’ (“APS”) Portfolio Advisor Wrap Fee Disclosure Brochure. The ADV is a public disclosure document required by the Securities and Exchange Commission (SEC) of all professional investment advisors. The Form ADV discusses investment strategy, fee arrangements and service offerings. In my opinion, the relevant items are:
Compensation arrangements. In the “Advisor Compensation” portion of the ADV, TIAA states several times that “The compensation does not differ based on the underlying investments chosen within the solution, nor does the Advisor receive any client commissions or product fees.” While true, these “salaried” advisors do in fact earn “credits” towards their annual variable bonuses based on a number of factors. The ADV states clearly, “the annual variable bonus gives Advisors a financial incentive to enroll and retain client assets in the program” (i.e. a managed fee account, more complex solutions, or other TIAA products such as life insurance). The ADV states again that “Advisors have an incentive to and are compensated for enrolling and retaining client assets in TIAA accounts, products and services, but do not receive any client commissions or product fees.” Advisors are also compensated for “gathering, retaining, and consolidating” any new TIAA client accounts that they persuade clients to transfer to TIAA from other brokers (e.g. Morgan Stanley, Fidelity, Merrill Lynch, etc.).
In addition to the base salary received by all advisors, TIAA provides additional compensation in the form of variable annual bonuses to individual advisors. These bonuses are determined not only as a percentage of the amount of assets under management advisors accumulate, but also by the amount of wealth advisors are able to transfer from existing funds into their TIAA managed brokerage accounts. This means, that, while advisors receive a base salary (“no client commissions or product fees”), the bonus structure heavily influences advisors to move client assets to new managed accounts with added management fees, and to sell complex solutions (i.e., TIAA annuities or TIAA insurance) to their clients. In my opinion, this adds a conflict of interest similar to that of conventional brokers who receive higher commissions for selling certain products or certain funds. Yet, TIAA continues to emphasize its “no client commissions or product fees” mantra.
My additional concern about TIAA is that their recent more aggressive sales tactics seek to funnel existing TIAA clients nearing retirement into much higher cost TIAA Advice & Planning Services Advisor managed accounts. Enrolling in these accounts could result in retirees unknowingly paying additional fees to the advisor on top of the mutual fund fees they now pay in their current TIAA accounts. Accepting a TIAA Advisor’s Advice & Planning Services proposal contract includes substantial additional fees which may not be apparent to a customer who does not mine the depths of the lengthy ADV, Part 2 disclosure document.
How much would an unsuspecting TIAA client who converted to a TIAA Advisor wrap fee account pay annually? The TIAA fee schedule for Advisor & Planning services accounts is an asset-based program fee. (reproduced below from the Form ADV):
If a TIAA client with $500,000 in assets chose to work with a TIAA Advice & Planning Services advisor in a program account, their annual fees (in addition to annual mutual fund fees) would be $4,925; for a client with $1,000,000 in investments accounts, their annual fees would be $8,925. My concern is that TIAA clients contacted by or directed to a local TIAA advisor may not understand or realize the higher fees that come with that advisor’s proposals.
A final concern deals with TIAA directing existing clients to their local representative for a “review”, as we personally experienced. That “review” comes with a hidden incentive for the local representative to propose an advisor managed account. In addition to our being contacted by phone several times, the TIAA website has been redesigned to feature a prominent “My Advisor” icon on every page in the upper right. Existing clients who login to view their accounts and use that icon are directed to call their local TIAA representative. Why is the local representative “My Advisor” rather than TIAA representatives reachable by phone whom we have dealt with in the past?
TIAA has an exemplary not-for-profit heritage of serving education professionals with low cost, well-rated funds. While the TIAA Board of Overseers continues their service to nonprofit employers, the new TIAA Advice & Planning services business structure follows a more common brokerage firm model. Specifically, the way their advisors are compensated appears to incentivize TIAA salaried employees to steer clients to higher cost managed accounts and other insurance products and to gather additional assets held outside TIAA. I believe that this managed account model introduces a conflict of interest for advisors to serve the best interests of TIAA clients. Per the TIAA whistleblower’s complaint, this bonus compensation structure pushes advisors to move clients into products “more costly to clients while adding little value”. While a TIAA advisor’s proposed investment portfolio may appear more diversified due to including a larger number of TIAA funds, the client’s original choices of fewer funds without the managed account fee may serve that client’s interests just as well at a much lower cost.
In addition, a TIAA advisor managed account provides solely investment advice. While tailored to your “goals”, I believe investment decisions should be made in the context of a comprehensive financial plan, not as an isolated component. Without incorporating tax planning, management of other risks and a detailed cashflow analysis, tailoring an investment portfolio to “your goals” can lead to unintended consequences, especially when making decisions about retirement income from a portfolio. As for financial planning advice, I recommend consulting a trained Certified Financial Planner™ professional who, as a fiduciary, is bound to act in your best interests. Why pay TIAA to manage your accounts when, for a similar fee, a fee-only planner can provide a financial plan that includes portfolio management in the context of a comprehensive plan?
While Bluestem Financial Advisors continues to enjoy a strong working relationship with TIAA through the SURS state retirement program, transparency is of the utmost importance to us, and we hope it is for you as well. Buyer beware: a proposed portfolio promoted to you by your local TIAA advisor may come with much higher ongoing expenses than just continuing to self-manage your original lower-cost TIAA mutual fund choices.
The Total Retiree Advantage Illinois (TRAIL) Program, a sub-program of the Illinois Department of Central Management Services (CMS) oversees the Medicare Advantage Open Enrollment for State of Illinois retirees and survivors. This open enrollment period occurs each fall. For 2016 the open enrollment period is October 15- November 16, 2015. During this time all newly eligible retirees and survivors must enroll or opt out of coverage and all currently enrolled TRAIL members must update their coverage. The rules and options can be a bit confusing in the year you turn 65 and also enroll in Medicare, so to help you better understand the process we have highlighted a few important points:
You don’t switch health plans until the fall of the year you turn 65. If you turn 65 after open enrollment for the upcoming year, you keep your plan for one additional year. For example, if your birthday was December 1, 2015, you enroll in the state Medicare Advantage Plan during the 2017 open enrollment period in Fall 2016. When you turn 65, you will enroll in Medicare. Inform your current health plan that you have done so, so that Medicare becomes your primary provider.
For open enrollment after turning age 65, you will get a letter on yellow paper in the fall (mid-September) informing you that you need to enroll during the Fall Medicare open enrollment period. During that period, you will be required to switch out of your current health plan into one of the state Medicare Advantage Plans.
For those living in Champaign and surrounding counties, you have to choose between United Health Plan PPO Medicare Advantage Plan or the Coventry Advantra HMO Medicare Advantage Plan. It seems that most people choose the United Health Plan because it allows a choice of doctors at Carle and Christie, and provides coverage throughout the US. You will receive information on both plans and can research whether your doctors are included in each plan. Once enrolled in one of those Medicare Advantage plans, you may make changes during subsequent open enrollment periods in following years. You will receive updated information on plan options from the TRAIL system during that time. If you want to stay with your current provider, you do nothing.
The Delta Dental and EyeMed plans continue with the July 1st renewal date, so the benefit choice period for changing those plan remains the month of June.
Both available plans (when both spouses are in Medicare) are Medicare Advantage Plans which include Part D drug coverage. It is important NOT to enroll in a Medicare Part D drug plan through your pharmacy. Doing so will kick you out of the Medicare Advantage plan through SURS. This has been a problem for some retirees as the pharmacies heavily promote enrolling in their Medicare Part D drug plans.
For more facts and figures you can view an informational slide presentation from TRAIL here, or visit the TRAIL website here.
Illinois Department of Central Management Services
