Effective September 2020, big changes will be happening to the SURS Self-Managed Plan (SMP). This includes a name change to the SURS Retirement Savings Plan (RSP). We have been monitoring these changes and will continue to keep apprised as new information is released. While much of the transition will happen automatically, some action will be required by plan participants. We plan to reach out to each client impacted this fall to guide them through the changes.
Background - Why is SURS making changes?
SURS SMP is a defined contribution pension plan. This means future benefits are determined based on contributions made by you and the State of Illinois, plus growth of the account. While it comes with added flexibility and portability over a traditional defined benefit pension plan, it does shift the investment risk and uncertainties of pension liabilities to the employees.
With the self-directed nature of SMP, SURS has found many participants fail to properly manage their own plan. These participants allow their accounts to remain in default investment choices and fail to periodically rebalance or make changes. This led to an array of problems, from lack of growth sufficient to meet income needs, to excessive risk for those nearing retirement. SURS is attempting to correct this issue through a new default investment selection, the “SURS Lifetime Income Strategy”. Like a Target Date Investment fund, it automatically allocates to a risk level predetermined by your expected retirement age.
Additionally, this change offers a solution to another common complaint of forced annuitization. Future promises of retiree health insurance are tied to your SURS plan. Up until now, this benefit is forfeited if you do not annuitize your account balance (fully convert the balance of your plan into a lifetime stream of income) at retirement. While annuitization can guarantee income for life, it does give up flexibility to withdrawal lump sums for single expenses. It can also mean your family members are left with little to no value upon your death. With this change, some flexibility is added through the SURS Lifetime Income Strategy.
New Flexibility – No Forced Annuitization
Under the new SURS Lifetime Income Strategy, you are no longer forced into annuitizing your account balance at retirement to qualify for retiree health benefits. If you move at least 50% of your account into the new Secure Income Portfolio (SIP) at retirement, you can retain your health benefits. The SIP will be invested in a pre-determined portfolio to provide a stream of income guaranteed for life.
The remaining account, if not invested in SIP, can be invested however you direct. There would be no guaranteed income stream for this portion, but you would be allowed to keep funds invested for growth while maintaining the flexibility of withdrawal like any other investment. Most importantly, funds not spent through your lifetime could be passed on to family or other beneficiaries after your death.
While all these changes will give you more flexibility, the new choices do come with tradeoffs. The guaranteed income feature is made possible through an underlying insurance contract. This feature is a common rider on private sector annuity products through Guaranteed Minimum Withdrawal Benefits (GMWB). Like any insurance contract, you pay a premium in exchange for transferring risk. In this case, premiums will come in the form of higher administrative charges to cover the insurance premium, which will show up as reduced investment returns. These charges equal 0.95% (Source Citation below), or $95 per $10,000 invested.
Illustration: Insurance Fee for Secured Income Portfolio
It is also worth noting the guarantee is only on income, not principal. This means, if you continue to take income during down markets, you may use up your own account balance first. In that event, the insurance contract would continue to pay income for your lifetime but guarantees no principal will remain for your beneficiaries.
Another downside is the income itself. Comparing the income streams of a traditional annuity vs. the SIP, it is likely the SIP would provide a lower amount of annualized income. This is because, in the insurance pool of a traditional annuity, the insurance company knows some participants will die early which allows them to pay higher benefits to everyone and cover the costs of those who live longer. In the SIP, the participants who die young can leave principal to beneficiaries. With less risk pooling, it is unlikely the SIP can provide the same level of annual income as a traditional annuity.
Provider Changes
Currently, the SURS SMP accounts are administered by two providers: Fidelity and TIAA. These providers are acting in two capacities. First, acting as recordkeeper and custodian of the plan. This is primarily an accounting function to keep track of account balances, inflows, and outflows as well as to hold the various funds in your plan. Second, these companies act as the primary provider of the investment lineup (overseen by SURS). To facilitate the changes discussed above, SURS had to identify a new provider to handle the administration of existing investment functions as well as the underlying insurance contracts backing the SIP. This led to the selection of a new recordkeeper and custodian, Voya.
Retirement plans administered by insurance companies have historically been subpar compared to plans administered by Fidelity or TIAA. This is because the investment lineups are often heavily based on the proprietary funds of the provider itself. In turn, the underlying fees of the investment choices were high. While Voya will be taking over as recordkeeper in the upcoming change, the investment line up is primarily managed by third-party providers with low fees.
In this case, the new investment lineup consists of “White Labeled” versions of mutual funds provided by various investment management firms. This means the investments will be branded under the SURS name, but are managed by third party companies. For example, the SURS US REIT Index Fund is actually the Vanguard REIT Index Fund. Other names backing the SURS branding include low-cost providers such as Blackrock and State Street, along with more actively based names such as PIMCO and Columbia.
Investment Lineup
As discussed before, for those who fail to opt out of the default selections, you will be placed into a Lifetime Income Strategy Portfolio. It appears this is a combination of different portfolios (Stock, Bond, Real Estate and Cash), that adjusts automatically based on your age. While we do not yet know how these will adjust, we do know the underlying portfolios are broadly diversified index portfolios with a low cost. Fifteen years before your target retirement age (at earliest, age 45), you will begin to shift into the Secured Income Portfolio, which offers the guaranteed lifetime income provisions. This will add a cost of 0.95% annually on any amount invested in the SIP. While not an inappropriate cost for those who need a guarantee, that added cost will make the alternative funds more attractive if guarantees are less important.
For those who opt out of the default funds, there is a Core Fund lineup. This is designed for those who want to self-manage their portfolio (or have an Advisor like Bluestem to recommend funds). At first review, our opinion is the lineup of funds under the new plan has improved, both in quantity and quality. Specifically, the number of available funds has decreased. While it may seem counter-intuitive, fewer funds is generally better for the average investor. There are many reasons why this holds true:
More fund choices can confuse consumers, which lead to never changing out of default selections.
More fund choices may lead to a false sense of diversification, when in fact the investor has purchased multiple funds with similar investment strategies.
More choices may lead to chasing past performance by picking last year’s winners, while ignoring whether or not the funds’ risk is appropriate for that investor.
In reducing the number of funds, SURS has selected a fund lineup that is more focused on low-cost, index strategies and eliminated almost all higher-cost, actively managed funds. For example, each new index fund has a lower administrative cost structure as compared to index funds currently available at Fidelity or TIAA. This includes the US Large Cap Equity fund with a 0.00% expense ratio (i.e. – No underlying administrative expense).
What action should I take?
For our clients, we have engaged in an investment strategy focused on tax efficient investing through location optimization. As a result, your investments across all various retirement and non-retirement accounts, are managed as a single portfolio. Within the various accounts, we select investments that not only fit the entire portfolio, but also match the particular tax attributes of an account. For example, the long-term tax implications of a pre-tax account (such as an IRA) are very different from those of a tax-free Roth IRA. Therefore, we would select different investments for each, the pre-tax focused on stability and income and the Roth based on growth.
As SURS will move your portfolio into the Lifetime Income Strategy by default, it will likely not align with our current strategy for your account. Therefore, we will need to work together to map your current investment strategy to the equivalent Core Funds under the new plan. Your only action will be to setup a new login to your account on September 1st. We will setup a time to login together to make appropriate adjustments.
Regarding the Secure Income Plan (SIP), it is unlikely this plan will be appropriate for our clients during their working years. We already manage our portfolios in a manner designed to hedge against sudden market fluctuations in the years leading up to retirement by building a ladder of US Treasury STRIPS (i.e. – your bond ladder). This will likely include those who are retired, but not needing immediate access to retiree health benefits. For those who retire and wish to take advantage of retiree health benefits, but not annuitize, we will discuss together the pros and cons of the SIP plan.
Blog Post Update February 24, 2020:
Secure Income Portfolio Fees determined from page 20 of SURS Lifetime Income Strategy Overview (link below). Hypothetical fee table determined by multiplying account balance times annual fee.
SURS Resources:
SURS Retirement Savings Plan Homepage
