Many industries in the last few years have had their services or products impacted by supply-chain issues or labor shortage issues. The world of public accounting, tax preparation, and CPA services have been no different. Don’t wait until the last minute to come up with a plan to find help with tax preparation!
Regardless of your employer, remember that it is all too common to underestimate the possibility of an extended illness or other event that would make full-time employment impossible. Take a closer look at the disability benefits offered through your employer and consider if additional long-term disability insurance would protect the financial health of your family.
Finding Your Philanthropic Focus
By Shari Fox, CAP®
Principal, Fox Philanthropic Advisors LLC
Are you interested in using more of your financial resources to help others? Do you want to give more but find it challenging to decide where to donate your time and resources? Do you want to ensure the charitable giving you are already doing has the most significant impact possible? Have you ever felt overwhelmed by the sheer number of charities and causes out there, making it difficult to know where to start?
If you've answered yes to any of these questions, then this blog is for you. We'll explore the steps you can take to narrow your focus in charitable giving, allowing you to make a real difference in the world. Are you ready to learn how to make the most of your charitable donations and help those in need? Let's dive in!
To start, look at the giving you are already doing. You likely compiled receipts from the charitable organizations you supported last year to file your tax return. Or if you have a donor advised fund, maybe you reviewed a summary of your grants for the year. Did you notice anything? Was there a pattern? Did you make a few large gifts to organizations within a particular cause (education, global health, or the environment, for instance)? Or did you make a lot of small to modest gifts all over the place?
First, whichever of the above holds true for you – thank you. Thank you for being generous and caring about your communities, local and global. If those gifts add up to a substantial portion of your income or wealth, though, particularly if the total is large enough for you to itemize deductions, you have an opportunity to be intentional about making a difference.
Think about that for a minute. What change would you like to make in the world? Seriously. What would you like to accomplish with your money that would be meaningful to you?
If you’ve never taken the time to determine your philanthropic focus, start by reflecting on your motivations for giving.
⠀⠀⠀⠀⠀⠀⠀⠀· Why do you give? Is it in response, or is it to create?
⠀⠀⠀⠀⠀⠀⠀⠀· What do you hope to gain from your giving?
⠀⠀⠀⠀⠀⠀⠀⠀· What do you want to sustain in the world?
⠀⠀⠀⠀⠀⠀⠀⠀· What do you want to change in the world?
Write down your answers. Then, reflect on your core values. Here are some possibilities.
Try to narrow it to three from this list, five tops. Write them down. Are they reflected in your charitable contributions? Review that stack of receipts from charitable organizations, the one you compiled for your tax return. Is there an opportunity for you to establish a philanthropic plan that more intentionally aligns with your core values?
Identifying your philanthropic focus can make giving less reactionary and more meaningful. It's crucial to uncover your motivations for charitable giving to make sure that your donations have a more significant impact. I had the pleasure of getting to know a woman who did just that. She turned 100 recently, and we sat down to discuss her reflections on a lifetime of philanthropy. She told me that since she was a young adult, she has always been open to giving to community needs. As she became more experienced as a donor and volunteer, though, she realized how much her childhood experiences and her access to a good education, particularly a college degree, had influenced her life as an adult. With that in mind, she began to focus her dollars and her time in the areas of women and education, particularly in her local community. Her primary areas of support include programs that help women advance their education and employment opportunities.
Through her volunteer efforts, she also saw that many children did not have opportunities to interact in productive ways outside of the classroom, and that the only way many of them knew students of other schools was as rivals on the playing field or court. She decided that in addition to programs that help women achieve their personal goals, she would prioritize developmental and social programs that bring together children and teens from different backgrounds, believing that when combined with a good foundational education, these would help them grow into healthy, engaged citizens.
These areas of emphasis would, in this philanthropist’s thinking, improve lives and contribute to the betterment of society as a whole.
Another couple with whom I’ve worked had a particular interest in leadership development, as they had each risen to positions of prominence during their careers. This, too, is a broad category, so they spent time discussing where and how they wanted to have an impact. They landed on supporting student leadership programs at their alma maters, funding leadership development retreats and programs to bring back successful alumni for multi-day residencies. In addition, they funded an academic research project to determine the impact of one university’s student leadership programs on its alumni success, thereby informing the efficacy of their contributions and others’.
These are simply two examples of donors being intentional about their philanthropic focus. There are many others, whether they be healthcare, medical research, animal welfare, the arts, environmental sustainability, mental health – the list is long and the need for investment is great. Like other worthy endeavors, doing philanthropy well takes some work. The rewards, however, can be beyond measure.
This post was guest written by Shari Fox of Fox Philanthropic Advisors. If you would like to delve deeper into your personal or family philanthropic mission and practice, contact me at sharifox@foxphilanthropic.com for an exploratory conversation. The first one is on me.
The team at Bluestem believe that charitable giving can play a crucial role in helping our clients achieve a more fulfilled life. If you're interested in incorporating charitable giving into your tax and financial plan, we would love to help. Here is how to connect and learn more.
Fox Philanthropic Advisors LLC Disclaimer: This information is not intended as legal, tax, or financial planning advice. Readers should consult with their own professional advisors before making any charitable gift.
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.
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.
