The forename Irma is of Germanic origins and means “universe.” For many retirees, Medicare IRMAA is of universally confusing origin. In this article we’ll cut through some of the bewilderment, and hopefully leave you with a sounder understanding of IRMAA’s purpose, calculation, and planning opportunities.
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 After age 60, the other half – the LIS half – can be used or withdrawn as desired.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 found that retiree health insurance benefits can be the most common point of confusion for State of Illinois employees retiring under the State University Retirement System (SURS). In this post, we will break down the basics of the Retiree Health Insurance Benefit, how to qualify, and the features and drawbacks of this benefit.
Special Note for SURS Retirement Savings Plan participants: In fall of 2020, SURS rolled out the newly rebranded SURS Retirement Savings Plan (RSP), which has added another layer of complexity. See the whitepaper we wrote for a more detailed overview of this change.
To begin, let’s discuss the qualifications for retiree health insurance benefits. The first requirement is service credit. Service credit can vary based on your SURS membership Tier, which is determined by the date of first employment under a SURS covered employer. For anyone with service credit prior to January 1, 2011, you are considered a Tier I participant. A Tier I participant is eligible for retiree insurance benefits after 5 years of service credit. Anyone beginning service credit on or after January 1, 2011 is a Tier II participant. 10 years of service credit is required for Tier II participants to be eligible for any retiree health insurance benefit.
The service credit discussed above is the minimum requirements to be eligible for retiree health insurance. Meeting the minimum service credit requirements only provides for a subsidy of the cost of this benefit. To have your insurance fully subsidized by the State of Illinois, you need 20 years of service credit. Members who meet the minimum coverage requirements and have less than 20 years split the cost of coverage with the state. The chart below summarizes this cost split:
Costs above are for the employee only. Coverage for a spouse or dependents is available for an additional cost.
The second requirement in addition to meeting the service credit requirements to qualify for retiree health insurance is to annuitize your pension. If you separate from service and defer taking a monthly retirement benefit under SURS, you would not be entitled to the retiree insurance benefit until you have annuitized your pension plan. Taking a refund of your pension plan balance, including rolling over your plan balance to an IRA or other retirement plan will result in a forfeiture of retiree health insurance benefits.
Annuitization of SURS is the process of converting your benefit into a stream of income payable monthly for the remainder of your life. For the Traditional and Portable plan, this is fairly straightforward. Your pension is based the higher of two formulas which SURS will calculate for you. Your main decision is whether to select a survivor benefit for your spouse or a qualified dependent.
The Retirement Savings Plan has more flexibility, which makes annuitizing a bit more complex. Here is a summary of your options.
1. Annuitize the entire balance of your SURS RSP. This annuity will generally be administered for SURS through Principal Insurance company, or at TIAA if you still have funds in your RSP portfolio invested at TIAA.
2. Move at least 50% of your RSP portfolio balance into the SURS Secure Income Portfolio and activate the lifetime income benefit. When selecting this option, all RSP investment funds not otherwise annuitized must be first moved into the Lifetime Income Strategy (LIS) portfolio. Next, with all non-annuitized RSP funds in the LIS portfolio, at least 50% of those LIS funds must then be moved into the SIP with its guaranteed income benefit. After moving all funds into the LIS and activation of at least 50% of your LIS fund total into the guaranteed SIP, any LIS funds not in the SIP may be moved back to RSP Core Funds or withdrawn.
3. A combination of Options 1 & 2 – for example, you could use 1/3rd of your RSP account to buy an annuity through Principal. With the remaining RSP balance, allocate 50% to the SIP for lifetime income and 50% to the LIS or Core Funds for periodic withdrawal.
We have commonly heard the misconception that RSP participants must use the new SIP to maintain health insurance, which is not true. Electing an annuity remains an option.
It is possible to retire from the University and delay drawing your pension. This may be beneficial if you have alternative insurance coverage through new employment or a spouse. Deferring your benefit has two potential benefits. First of all, your pension benefit (traditional or portable) may increase or the balance of your account can continue to grow (RSP). Secondly, if you are not yet Medicare-eligible, the State of Illinois will pay an additional monthly incentive to opt out of retiree insurance.
A University Employee has 20 years of service at age 50, at which point she leaves university employment to pursue a second career with a private sector employer. The new employer offers health insurance. The employee leaves her account balance with the SURS RSP, which allows the balance to continue to grow. At age 63, she fully retires from her private sector position and needs health insurance. At this point, she activates one of the RSP income options to qualify for health insurance as a State of Illinois retiree.
There may be cases where an individual chooses to forgo their SURS retiree health insurance benefits, but before making this irrevocable decision, it is important to understand what those health insurance benefits are worth.
Those in the SURS RSP are also required to participate in Medicare. While working, everyone pays into the Medicare system. Upon turning age 65, you must sign up for Medicare. If you are still working and covered by your University insurance, you only need to enroll in Medicare Part A, but may delay Part B until you retire.
Medicare has three parts:
Part A, which covers Hospital services and is generally free for those age 65+
Part B, which covers doctor visits and other outpatient services. Part B has a monthly premium starting at $170.10 (2022); cost can increase based on income.
Part D, which covers prescription drug costs
Once you retire and become a SURS annuitant aged 65 or older, you are required to enroll in the Total Retiree Advantage Illinois (TRAIL) plan, managed through Illinois Central Management Services (CMS). This is a Medicare Advantage plan, which means it combines Medicare Part A, Part B, Part D and a Medicare Supplemental Policy (commonly known as a Medigap policy). Even under the TRAIL program, you still must pay the Medicare Part B premiums on your own. The State of Illinois subsidizes (or entirely covers) the rest of your supplemental health cost.
For a retiree with 20 or more years of service, age 65 or older and on Medicare, the value of this benefit is around $150 per month. This is based on the amount the State of Illinois covers for the cost of the Advantage Plan (Illinois Central Management Services, 2022).
For a retiree with 20 or more years of service and under the age of 65, the SURS health insurance benefit is significantly more valuable. Prior to Medicare eligibility, the State picks up the entire cost of their health insurance. For those retiring before age 65, the cost of health insurance can be a significant obstacle. For example, marketplace plans at healthcare.gov range in cost from $1,165 to $1,791 for a 60 year old male in the Champaign County area.
Health Insurance is one of the biggest obstacles we see for clients who wish to retire prior to eligibility for Medicare at age 65. If you are retiring early from the University, it could be a valuable benefit. The requirement to annuitize is the biggest obstacle, especially for those in the SURS Retirement Savings Plan. Once you are Medicare eligible, the value of the insurance benefit is less valuable as Medicare covers a significant portion medical expenses and Medicare supplement policies are low in cost as compared to private health insurance.
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.
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.
This month marks passage of the first Illinois state budget in over two years. The biggest changes resulting from this budget are to the Illinois tax code. Effective July 6th of this year (and retroactive to July 1st), the individual income tax rate has been increased to 4.95% along with other modifications to corporate tax and lesser used tax credits. Details of this bill are still coming, but we do know that this bill also requires changes to the State University Retirement System (SURS) Plan.
Under SB 0042 – Fiscal Year 2018 Budget Implementation Act, SURS is directed to create a new Tier III plan. All new employees hired who first become participants of SURS after the effective date of this new plan will have the choice of this new Tier III plan, the current Tier II plans (Traditional or Portable), or the Self-Managed Plan (SMP). SURS needs to work out many of the details for this new Tier III plan and formally adopt the changes before implementation. Therefore, we do not know the effective date at this point.
Further, existing employees in Tier II will also have the option to opt into Tier III, but the choice would be irrevocable. If you are uncertain which Tier plan you are in, Tier I generally applies to participants enrolled in a SURS Portable or Traditional pension plan before January 1, 2011. Everyone employed after this date is generally Tier II. The new Tier III pension plan would not affect those in Tier I plans or those who chose the Self-Managed Plan (SMP).
The overall goal of this Tier III program is the creation of a hybrid plan – a cross between a defined benefit and defined contribution pension system. In other words, it acts like a mix between the features of the Traditional/Portable Plans and the SMP Plan. Under Tier I and Tier II, the Traditional & Portable Plans are considered Defined Benefit pension plans. In these plans, the employer assumes all of the investment risk. The retirement income that you will receive is determined by a formula that takes into consideration your earnings and length of service. The SMP Plan is a Defined Contribution plan. The employer contributes a pre-determined percentage of your earnings to the SMP plan on your behalf. Those funds are deposited into your account to be invested at your direction (self-directed). This means you are responsible for selecting and managing the investments now and into the future. Your future retirement income depends on the balance of your SMP account at retirement.
Under this newest hybrid Tier III plan, you would get a combination of the two plan features above, albeit with a lower benefit from each. As laid out in the budget bill, the main features of the two components of the Tier III plan are:
Tier III Defined-Benefit Portion would include a pension based on:
Tier III Defined-Contribution Portion would have the following provisions:
Another big change in the budget bill shifts responsibility for funding the SURS employer contributions from the State of Illinois to each university. While increasing university budget expenses, this change will have a smaller impact directly on employees in the SURS system than the new Tier III hybrid plan.
While Tier I participants are not affected by the SURS changes, there are more proposed bills in the pipeline that may affect all SURS pension plan participants. One bill currently under consideration aims to slash the SURS pension Cost-of-Living Adjustment (COLA). To avoid the diminishment of benefits rule, it would offer defined benefit pension plan members a choice to keep their current COLA, but lose all rights to future increase in pension benefits as their salary increases; OR take a reduced COLA in exchange for continued accrual of future pension benefits and lower employee contributions. In other words, you could keep the COLA but lose future accrual of a higher initial pension or take a reduced COLA for continued benefit accrual. Additionally, the proposed legislation appears to offer lump sum buyouts to entice current members out of the SURS defined benefit plans. However, this bill has not passed yet and it is too uncertain to make predictions.
In all cases, there are still many details left before decisions can be made. We know changes are coming for new employees. Existing employees under Tier II Traditional or Portable plans will likely face an irrevocable choice to stay in Tier II or move to the new Tier III hybrid plan. However, SURS needs to make final plans before any analysis can be done. We will continue to monitor and keep our clients informed when changes will affect them.
For more information on the legislation discussed in this post click here.
To view our previous blog post on SURS plan selection click here.
The U.S. Department of Labor just released its long-awaited fiduciary rule. The new rule aims to protect consumers saving in retirement accounts by amending the definition of fiduciary. The rule, in the pipeline for several years, applies to IRA, 401k, 403b and other retirement accounts that fall under the Employee Retirement Income Security Act (ERISA). Advisers and Brokers giving advice on investments in retirement accounts will now be required to act in the client’s best interest, i.e. when they offer advice on investment products in retirement accounts they must provide impartial advice and avoid conflicts of interest. Prior to this, they were only required to sell “suitable” investments to clients. While the rule does make a gallant effort to protect consumers, it also gives many concessions to commission sales-focused advisers. The rule implementation timeline was extended to January 1, 2018 (causing many to argue this simply gives more time for large companies to fight the rule); the rule also allows brokers to continue to sell certain products as long as they enter into a legal contract with the consumer that, among other things, discloses any conflicts of interest. How many consumers will read and understand such contracts? The rule has received considerable opposition from large investment firms, mainly those in the industry who are heavily sales-focused. Their major complaints revolve around new compliance regulations and the fact that the rule will dramatically alter their former commission based-sales approach. The prior “suitability” rule has no requirement to put the consumer’s best interest above the advisor’s interests.
While many in the financial services industry are upset by the new rule, others, like Bluestem, welcome the new consumer protections and are thrilled that the DOL is making an effort to help protect individuals saving for retirement. As a Fiduciary, Registered Investment Advisor, Bluestem always has and always will put our client’s best interest first. We are proud to be a fee-only financial planning firm and will continue to offer unbiased advice and stellar service to all of our clients. While other firms need regulatory nudging to get on board with fiduciary standards, we live by them every day. In fact, the financial planning organizations we belong to, NAPFA and ACP, believe that the new rule is a step in the right direction to add much needed consumer protections.
So how does this DOL rule affect Bluestem? In a nutshell, it doesn’t. It’s very possible that there may be some new regulatory compliance procedures for us, but in the big picture, Bluestem isn’t making any changes. Bluestem is passionate about fee-only, no product sales, financial planning. It’s this passion for fee-only planning that has kept us on the right side of this issue from the beginning. While others will be clamoring to further water down the new rule or put up a fight to protect their outdated and biased way of offering “financial advice”, Bluestem will continue our efforts to provide trusted, clear-cut advice and spread the word about our professional fee-only alternative to product sales masquerading as financial planning.
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
The Illinois Supreme Court ruled today that Illinois State Pension Reform signed into law in 2013 is unconstitutional. This ruling does not come as a surprise. Previous rulings on healthcare indicated the court would interpret constitutional protection in favor of participants and strike the reform down. What does this mean to me?
Immediately, participants will not notice any major changes. With court challenges to the original reforms, implementation of reforms had already halted in 2014. This means none of the changes designed to reduce benefits or change contributions had been implemented. This applies to both those who are active participants and retirees.
Longer term, it is still unclear what will happen. Reforms were enacted to plug massive state budget deficits. The fiscal situation of the state is still dire. Current Governor, Bruce Rauner, has stated he intends to move forward with new reforms. It is unclear exactly what these changes look like, but proposals have included:
Since a majority of Bluestem's clients are current participants or retirees of the State University Retirement System (SURS) or other Illinois Pension Systems, we will continue to monitor this situation. Planning during this time will continue to be a challenge as proposals will be a moving target until passed into law. As always, contact us if you would like an individual review of your retirement plan.
The following is an update to previous postings regarding State of Illinois Pension Reform and Insurance for retirees. You can read those prior posts here. Following a court ruling that the State of Illinois wrongly withheld premiums for health insurance from retiree pension payments, members of the State’s five pension systems, including the State University Retirement System (SURS), are set to receive a refund. Refunds will be based on health insurance premiums paid from members’ pensions from July 1, 2013 through September 1, 2014. The premium refunds must be sent to members by June 14, 2015.
If you are affected, you should have received this State issued written notice informing you of options regarding the premium refund. The following is a summary of those options:
The amount of legal fees to be subtracted from members’ refunds remains undetermined. The State Universities Annuitants’ Association’s (SUAA) attorneys and others are pushing to base the legal fees on the number of attorney hours worked and a reasonable hourly rate, rather than on a flat percentage of the total settlement.
The Sangamon County Court ordered that the SUAA establish a website to provide information about the health insurance premium refund. The website contains a number of court orders and documents related to Kanerva v. Weems. You can access this website here.
Other Pension Updates At this time, implementation of the pension reform bill passed in 2013 is still pending the outcome of legal challenges to its constitutionality. Oral arguments are expected to begin in March 2015. In his recent budget address, Governor Bruce Rauner proposed new reforms as part of his effort to close the State’s budget gap. At this point, proposals are very preliminary. We believe any legislative action on such proposals is unlikely until a ruling by the Illinois’ Supreme Court on the legislation passed in 2013.
For updated information on this subject please read our latest blog post. This year has seen a flurry of lawsuits related to Illinois Pension Reform, including previous changes made to the State Retiree Health Insurance. Many of the cases are still in process, but here is an update on what we know:
In late 2013, Illinois General Assembly passed a bill aimed at reforming the pension systems for most Illinois public employees and Governor Pat Quinn signed the bill into law. This bill reduced future benefit increases for current retirees and decreased expected benefits for those not yet retired. Lawsuits quickly followed questioning the constitutionality of this law. The law was slated to go into effect as of June 1, 2014, but was suspended pending resolution of these lawsuits. This means that SURS and other State Retirement Systems are operating under the rules as they existed before pension reform was passed.
You can see my summary of the pension reform in two prior blog posts from December 6th and December 23rd. You can also view a SURS press release regarding the halting of pension reform here.
Before the pension reform discussed above, changes were made in 2012 requiring State Retirees to contribute towards the cost of their health insurance by a 2% deduction from their pension (1% for retirees enrolled in Medicare). Like pension reform, lawsuits were filed challenging this law. The opinion of many experts at the time of passage was that Retiree Health insurance was a separate benefit from pension benefits and therefore not constitutionally guaranteed. This was further backed by an initial court ruling. Since that time, there has been more action by the courts.
First, the Illinois Supreme Court overturned the lower court's decision by ruling that Retiree Health insurance is in fact protected by the same constitutional provisions that protect pensions. Then, shortly after, another ruling halted the July 2014 planned increase in premium contributions to be made by pensioners. Finally, a ruling this week determined that the state may no longer deduct health insurance premiums from retirees' pensions.
You can read more about this change here.
It is still too early to make substantial planning decisions. Immediately, retirees can expect their pension benefit to increase in the next month or two as health care deductions are halted. It is also possible that previously deducted premiums will be refunded. For retirees who previously deducted premiums paid as an Medical Expenses under their Itemized Deductions on their tax returns, they may have to claim refunds as income.
Additionally, some retirees opted out of state insurance in favor of alternative Medicare Supplemental, Medicare Advantage or other policies. This might sway those retirees to return to the state plan during open enrollment for 2015.
Longer term the State's position on pension reform looks more weak, but this is a complex legal matter. I expect we are a long way from any final resolution.
Updated information on this subject can be found in our latest blog post. This post follows up my initial posting about Illinois Pension reform and specifically how it impacts State University Retirement System (SURS) members. You can read my original post here.
Notwithstanding the likely legal challenges of pension reform, many items are subject to interpretation in the new law. It is likely additional legislative guidance will be needed to fully understand the impact of these reforms. This post is based on information from a knowledgeable representative of SURS, but may change in the future.
See the original post for complete details on this change. A question that arose is, if your income currently exceeds the limit, how would your future contributions be affected?
SURS interpretation is that your contributions will be based on pensionable earnings. Similar those who contribute to social security, no SURS contributions will be required on salary exceeding the limit. If your salary is grandfathered in, contributions are up to your grandfathered salary. No future pay increases exceeding the limit will increase your grandfathered limit or contributions.
For example, your salary in 2013 is $150,000. The pensionable earnings limit is $110,631.26. You receive a pay increase to $160,000. Your pensionable limit remains at $150,000 and contributions are based on salary up to that limit.
Future raises will not increase your grandfathered limit, which is equal to the participant’s annualized rate of earnings as of June 1, 2014.
This was not mentioned in my last posting, but changes are also being made to the Money Purchase Formula, which is one of three options for calculating your defined benefit pension. The annuity under this method is calculated by a cash value (determined from contributions made by the employee, employer, plus an effective interest rate determined annually). If used, this system determines the annuity from cash value using an actuarial table. The larger the cash value, the larger the annuity (up to limits). The effective interest rate of that cash value going forward will be the 30-year US Treasury bond rate plus 75 basis points (0.75%). Estimating the current 30-year US Treasury bond rate at 3.85%, the current Effective Interest Rate would be equal to 4.6%. Compare this to the effective interest rate 7/1/12 through 6/30/13 of 7.5%. As the interest rate is decreased, the potential cash value will grow more slowly therefore slowing the potential growth of the annuity.
This will also affect purchasing of service credit and the refund for those in the Portable system.
You should also note, the actuarial assumptions used in determining the annuity tables may now be revised annually. If experienced lifespans are increased or earnings are decreased, annuities calculated under this system would also decrease.
