Pension Reform for SURS Participants

This past week, the Illinois General Assembly passed a bill aimed at reforming the pension systems for most Illinois public employees and Governor Pat Quinn has signed the bill into law.  It is likely too early to begin a full assessment of what these changes mean for participants, including those in the State University Retirement System (SURS).  Time will be needed to fully review, interpret and digest the implications of the entire 327 page bill.  Additionally, lawsuits to contest the constitutionality of this bill are expected and will take time to resolve. At this point, we know very little.  The following is an attempt to summarize key provisions and begin thinking about planning to be done in the future.  As so much is unknown, it is likely too early to begin making decisions regarding your employment or retirement prospects.  This includes trying to contact SURS for an assessment of your individual situation.  Below are some of the key provisions with some of my own planning commentary in red:

Note: 

• A Tier 1 participant is an employee or retiree who began SURS participation before January 1, 2011.  A Tier 2 participant is an employee who began SURS participation on or after January 1, 2011.
• This content mostly applies to all pensions, written specifically to those in the SURS system.  A colleague, Dave Grant of Finance for Teachers, has a more thorough blog post specific to the Illinois Teachers' Retirement System (TRS).  You can read his post here.

Automatic Annual Increases:

Beginning in 2015, annual increases for Tier 1 participants will be 3%, compounded annually, but will only apply to the lesser of the annuity or a multiplier equal to $1,000 times number of years of service.  The multiplier will be adjusted annually by inflation (CPI-u).  Since the cost of living adjustment (COLA) was added to the SURS pension in 1989 and has become a large portion of the pension liability, this was a likely target of reform.  In past conversations Karen and I have had with a knowledgeable SURS official, it was this official's opinion this COLA Adjustment was not constitutionally guaranteed.  Soon to be filed court cases will be the final judge.

Retirement Age:

For those under the age of 46 (as of June 1, 2014), retirement eligibility will be delayed.  The younger you are, the longer the delay.

Earnings Limits:

Tier 1 participants will be subject to the same pensionable earnings limits that Tier 2 participants are already subject to (currently about $110,000, adjusted annually).  Participants exceeding this limit at the time of enactment will be grandfathered in at their earnings rate on June 1, 2014.  It appears if your salary is currently over this $110,000 limit, future pay increases will not increase your pensionable earnings except to the extent the pensionable limit exceeds your income.  However, number of years in the SURS system will still affect your final pension.  This is a big loss for higher income earners or those who expect higher income in the future.

Employee Contribution Decrease:

Tier 1 participants will have their contribution decreased by 1%.  This appears to be a point of negotiation in exchange for other losses of benefits.  This will likely be a point of consideration for the courts to judge if this is adequate consideration for lost benefits.  At a minimum, anyone affected may consider contributing that 1% decreased contribution to an alternate retirement savings vehicle such as their 403b or Deferred Compensation Plan.  

Defined Contribution Plan:

Tier 1 participants will have the option of electing into a defined contribution type plan by July 1, 2015.  This will be limited to 5% of participants.  A lot more details are to be worked out here, though it will likely look similar to the SURS Self Managed Plan (401a).  This may be enticing to younger, higher income participants.    

Unused Sick/Vacation Time:

For new hires after June 1, 2014, unused sick and vacation time will no longer be applied towards service credit or enhancing pensionable earnings.

For more details on these changes, see the full bill (SB1 - Click Here) or a summary of changes by SURS (SURS Summary of Senate Bill 1).

Note: It appears many of these changes are not slated to affect participants in the self-managed plan or Tier 2 participants.

The Takeaway:

This is a very contentious issue with various interested parties and real impacts on many people.  It will take a lot of time before all these issues are sorted out.  As more is known, we will be addressing the individual impact with each of our affected clients.  For those who are not our clients, I acknowledge that planning in uncertainty is difficult and stressful.  My best advice is focus on what you can control and build some cushion into your savings plan to deal with the uncertainty.  Contact us if you want the peace of mind of having an experienced Advisor on your side helping to plan for events such as this.

Insurance changes for Illinois State Retiree Health Insurance

The following is information regarding recent changes to Illinois State Retiree Health Insurance. These changes only apply to those who are enrolled in Medicare.  If you are affected by this change, you should be receiving a letter from CMS regarding the proposed changes to the SURS health insurance plan this week.  Note: if you are covering a dependent, you must both be enrolled in Medicare for this change to affect you.  If only one of you is enrolled in Medicare, then you will keep your existing coverage and May benefit choice period. Here is a summary of what we know:

Important! You must make a decision and enroll (postmarked) by December 13, 2013.  There is no default choice.  If you do not enroll, you will only have Medicare Parts A and B coverage which is very limited and does not include prescription drug coverage.    New state coverage will start February 1^st and run through December 31^st of 2014.    In future years, your open enrollment period for health insurance will be the same as the Medicare Fall enrollment period.  You will note this has changed from May, as in past years, to fall enrollment for this year and future years.  This is also the time to add or drop dependents, add, drop or change Optional life insurance coverage, and add or drop dental coverage.  

Coverage Summary

Every county in the state has different choices of plan.  Consult the map in the materials you receive, or follow this link and view page 8

In Champaign County, you have two choices of plans: UnitedHealthcare (UHC) PPO and Coventry Advantra HMO.

With the UHC plan, you can see any willing provider as long as the provider is in the Medicare program.  You should note there is no difference for in-network and out-of-network coverage levels, as with most PPO plans.  After a $100 deductible, you pay 10% of charges for services up to the $1,300 annual out-of-pocket maximum, then the plan covers 100%.

With the Coventry Advantra HMO plan, you must choose a primary care physician from within their network of providers, and use only in-network providers except for emergency care.  There are copays, and the annual out-of-pocket maximum is $3000.  There is a chart on page 11 of the Trail booklet comparing the costs for the two plans.

All SURS annuitants who are enrolled in Medicare Parts A&B (and SURS annuitants with Medicare enrolled dependents) will be required to enroll in a Medicare Advantage plan if they want to be covered by the SURS health insurance.  These plans include prescription drug coverage (MA-PD plans; MA equals Medicare Advantage, including Part A and Part B coverage; PD equals Prescription Drug), so you do NOT have to enroll in a Medicare Part D plan.

Caution! Be careful when enrolling as you may also be receiving mailed offers from private Medigap insurance companies.  These options do not qualify for State coverage.  To enroll in the state plan, your forms must have the “Total Retiree Advantage Illinois” logo (Your TRAIL to Better Health).  Here is the logo:

Vision, dental and life insurance benefit plans are not changing, but you must enroll in one of the State-sponsored plans to continue access to existing vision coverage.  Life insurance and dental, if elected, continue automatically.

Carle Patients: It appears that if you want to stay with Carle doctors, you need to choose the UnitedHealthcare PPO.

The Coventry Advantra website will be available on November 1^st.  At that time, you can look there for their providers in Champaign County.

Other Notes:

For community college retirees, you are in the College Insurance Program (CIP); if your SURS is from a State University or State of Illinois Department, you are in the State Insurance Program.  This is important, because prices are different for each program.

You could opt-out of state coverage and shop for an individual Medigap or Medicare Advantage coverage policy.  You would lose any subsidy from SURS state coverage if you make this election.  This could make sense if (1) premiums on a private policy are smaller than your 2014 2% of pension contribution (those with large pensions) or (2) you would rather pay a higher premium and continue on a Health Alliance Medicare plan.

If you are in the State Insurance program and you opt-out, you would have the option to enroll in the State-sponsored plan during the next open enrollment with coverage beginning January 2015.

If you are in the College Insurance program (CIP), opt-out provisions are different; you would want to verify them with CMS.

Complete information for: CIP – The Trail

Complete information for: State Insurance – The Trail

As always, please contact us if you have any questions or would like clarification.  

Moving Jobs, Moving Retirement Plans - New York Times

Changing jobs can be a stressful event.  At the same time you are learning new job responsibilities and acclimating to a new company culture, you have to juggle financial decisions such as choosing new employee benefits.  An often neglected detail of this process is what to do with your old retirement plans.  We often work with clients in “cleaning up” these old accounts that multiply and are lost track of over a career. With all the complexities of rolling over old plans, studies are showing many younger professionals are just cashing these plans out.  I recently discussed this with Ann Carrns of the New York Times.  I explain why I see this happening.  Here is an excerpt from that article:

[Jake] says when young adults are switching jobs, money is often tight — they may be moving, and need financing for rental deposits and other costs — and it is tempting to withdraw the cash.  In addition, he said, it is often difficult for them to envision retirement, when they are just starting their careers.

Besides the tax consequences of this action, which can be high, cashing out small retirement plans cheats the individual out of their most important asset — time.  The more time you have in investing, the less you need to “save” to end up with the same pot of money at the end.  By cashing out now, you are cheating your future self.  By putting off savings, you end up saving more and ending up with less value at retirement.

It is easy to see why someone in their 20′s or 30′s would be so willing to make this trade-off.  Retirement is an abstract concept many years into the future.  I try to counteract this thought by aiming for a different goal.  Replace the concept of “Retirement” with “Financial Independence”.  Financial independence is having the freedom from working to support your lifestyle.  Instead, you have the financial flexibility to work, volunteer or even not work and follow your passions.

The entire article was printed in the October 5th Edition of the New York Times, which you can read online by clicking this link.

Reconciling Fed Policy with your Financial Life

This past week, the Federal Reserve Board announced they were not cutting back on their efforts to stimulate the economy.  This surprised many investors, who had been expecting the Fed to begin tapering their bond buying program.  The question many have is, how does this affect my own financial decisions?  I had a chance to answer some of these questions on the September 20th Edition on Focus 580 with host Jim Meadows and guest Kevin Waspi.

Summarizing some of this program:

How Should I React to this News?

Both Kevin and I agreed on the answer to this question: for most people this is just market noise that can be ignored.  It is important to recognize the difference between an Investor, who is seeking gains by investing long term in companies and participating in the growth and income of those investments, and a Speculator, who attempts to profit by making bets on short term market movements.  For most individuals, it is more important to focus on meeting long term goals through sticking to their investment plan.  Speculating requires a lot more risk, knowledge and time than the average investor possesses.

What Does this News Mean about the Economy and my Portfolio?

One interpretation could be that the Fed is not optimistic about the recovery of the economy, which could be worrisome to investors.   However, the Fed's decision is based on many factors including unemployment and inflation.  They are in a delicate balancing act among many different factors.

Kevin pointed out that as the Fed does taper off their stimulus in the coming months or years, savers may benefit.  It could be expected that interest rates would rise over the long term, resulting in higher yields on checking, savings and even bonds.  In the short term, we should expect some volatility as investors try to gauge how market changes will affect future profits.

Check out the complete episode here.  We also addressed many other questions including:

•  How to decide between investing and saving an emergency fund
• What Fed policy may mean for future inflation
• How would changing interest rates affect the Fed Balance Sheet

Detroit and Public Pensions - Kiplingers

This past month, I spoke with Anne Kates Smith of Kiplinger Magazine on how those in public pensions should react to the the ongoing news regarding the Bankruptcy of the City of Detroit.  She posed the question, what should pension participants expect? Before addressing this concern, I would first start by cautioning everyone to put the Detroit crisis in perspective.  Municipal and Government bankruptcies are rare, and though they do happen from time to time, focusing on the outlier makes us believe this is more common than it really is.  This is a common mental bias we should be aware of.  This is why I always remind clients, focus most of your energy on what you can control because it will have the biggest impact on your future.

Given there is some risk, how should you respond?  I answered:

"Relying solely on your employer is never a good move," [...]

If you can contribute to a supplemental savings plan, such as a 403(b) or 457(b), do so. [...] If you're not offered a savings plan outside a traditional pension, set up your own individual retirement account—even if you don't qualify for tax-deductible contributions. Kuebler tells clients to aim for savings equal to 15% of income, which means that if the state requires you to contribute, say, 8% toward a pension, you should sock away another 7% elsewhere.

Your actual rate of savings may vary based on your own goals and resources, but each employee needs to take some responsibility towards their own retirement.  The State University Retirement System (SURS) for Illinois University Employees and the Teachers' Retirement System (TRS) for public school teachers are a great component of a retirement plan, but needs to be integrated with outside sources of retirement funding as well.

Be sure to check out the complete article in the October issue of Kiplinger or online.

Bluestem Launches our Blog!

Welcome to the inaugural blog post of our newly redesigned website!  I am particularly excited about this new site.  It tells the story of our planning process, and is designed to be more interactive!  With the launch of our Blog, we hope to keep you up to date on what is happening in the firm and add short discussions and articles of interest in between our quarterly newsletter. If you want to follow this blog, you can subscribe by email in the right hand sidebar.

In my first post, I am excited to announce a two milestones in my own education and experience you might be interested in.

Master's Degree

This past summer, I have completed my Master's Degree through Kansas State University.  I started this journey 4 years ago to meet the educational requirements to becoming a CERTIFIED FINANCIAL PLANNER™.  My degree is in Family Studies and Human Services, specialized in Financial Planning.  Like my Bachelor's Degree from the University of Illinois, this program is based on family and consumer research and theory.  My Masters courses beyond the CFP® courses included studies of quantitative issues such as real estate and consumer law issues, as well as qualitative applications such as financial counseling, family dynamics, and behavior biases.

Enrolled Agent

As part of my Master's program, I was able to use self-study coursework to become an Enrolled Agent (EA).  Enrolled Agent status is granted by the IRS after showing a high level of competency in the areas of Personal and Business Income Taxes, Tax Ethics and Procedures, and passing a background check.  Like a CPA or Attorney, EA's are afforded unlimited rights to practice in front of the IRS.  After a long process of studying, testing and application, I was granted the Enrolled Agent status in May of 2013.   This means that as part of Bluestem's audit protection services, I now have expanded rights to defend or represent our clients in the event of an audit.

These items both represent the completion of two large significant personal and career goals.  Though I have no immediate plans for additional degrees, I look forward to continuing my lifelong education and development.