Retirement Planning

Retiring Soon? What you need to know about SURS Changes (2019 Edition)

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. 

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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Buyout for Vested, Inactive Members – This option would allow SURS (as well as SERS and TRS) members who are vested but no longer active to elect to receive 60% of the actuarial value of their future pension benefits as a lump sum.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.

TIAA Changes More Than Just Its Name


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.

Our ADV Takeaways

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.).

My Concerns about TIAA Financial Advisor Compensation

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.  


Illinois’ Budget and Changes to SURS (2017)

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:

  • Final Average Salary (FAS) x Years of Credit x 1.25%.  This is less than the 2.2% of FAS used in Tier I and Tier II calculations.  The reduced pension benefit is designed to be supplemented by the additional savings in the required defined benefit contributions account described below.
  • (FAS) equals the average monthly (or annual) salary during the period of service in which earnings were the highest during the last 120 months (or 10 years) of service.  In contrast, Tier I uses the highest four consecutive years for FAS and Tier II uses the highest 8 consecutive years in the past 10 years of service (or equivalent highest consecutive earnings months).
  • Earnings are only considered and included up to the federal Social Security Wage Base ($127,000 in 2017).  This is actually higher than the Tier II plan earnings inclusion which is capped at $111,571.63 (in 2016, adjusted annually).   Tier I pensions have no cap on salary earnings included in the FAS final average salary calculation.
  • Retirement age under Tier III will be based upon normal Social Security retirement age. This means that retirement age of 67 (with 10 years of service credit) will apply to most participants. It is still unclear if there will be provisions for early retirement options for those who have attained more years of service.
  • Employee contributions are equal to the lower of 6.2% of salary or the normal cost of pension benefits.  This seems to imply that if the actuarial cost of a Tier III pension benefit is lower than 6.2% of salary, employee contributions may be less than 6.2%.  More details are needed to evaluate this.

Tier III Defined-Contribution Portion would have the following provisions:

  • Employee contributions of at least 4% of salary to this plan.  Combined with the Defined Benefit Contribution, total employee contributions could be as high as 10.2%.  This is higher than the 8% contribution rate currently required under Tier I and Tier II.  However:
  • Whatever the employee contributes, the Employer will match.  The language states this employer match may be no higher than 6% of salary and no lower than 2% of salary.  This will give each university flexibility to set up a higher match in an effort to attract talent and compete against other public and private employers; albeit coming from the respective university’s (or department’s) budget.
  • The employer contributions do not start until after one year of employment, but at that point are 100% vested for the participant.
  • Employer and employee contributions would be invested in a separate account maintained by SURS.  Likely it would be the same or similar investment choices we currently see under SURS SMP.

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


Selecting the Right SURS Plan for You


While starting a new position at an Illinois Public University may be an exciting time, there is a lot to do.  Beyond meeting your colleagues, learning the ropes of your new department and developing your new courses (if instructing), there is one big decision that needs to be made.  You need to select a Retirement Plan through the State Universities Retirement System (SURS).  This decision is complex, so do not put it off!  The following may provide some guidance when making your decision.

As background, there are two Tiers to the SURS Program.  Tier I, which has more generous pension benefits, only applies to participants enrolled before January 1, 2011.  (In some cases, if you were employed by a University system before January 1, 2011 but not a participant in SURS, you may still qualify for Tier I).  Tier II applies to those enrolled on or after January 1, 2011.  Because this post will mostly affect those enrolling in Tier II, what follows describes solely Tier II rules.    

So let’s get started!

Weighing the Options

When you begin employment at the University, you must select among three plan offerings; Traditional, Portable, or Self-Managed Plan (hereafter referred to as SMP). Once made, your plan selection is irrevocable and cannot be changed. Choose diligently, but do not delay. While SURS contributions begin immediately, you will lose employer matching under the SMP plan until you opt in. This could mean missing out on up to 6 months of employer matching by delaying your decision!  If you fail to select a plan by the 6-month deadline, you are automatically enrolled in the Traditional Plan.

Of the three choices, both 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. 

Identifying all possible factors and predicting all future outcomes is impossible.  We advocate making your plan decision based on being well informed and considering what you know today.  Here are some factors we consider when helping clients choose a SURS plan:

Investment Control

If you want to direct investment decisions and are willing to assume the risk of market performance, the SMP may be the choice for you.  Once enrolled, you direct where funds are invested and you have the ability to periodically review and make changes to the funds selected.  You currently have two choices of custodians for these investment accounts; Fidelity and TIAA-CREF.  Each provider has a wide range of investment choices.

If you prefer to have the employer retain the investment risk and receive a retirement benefit similar to a pension, then the Traditional or Portable may be the more suitable option.  These plans are professionally managed by the investment staff with SURS.  No matter the outcome of investment performance, your benefit is guaranteed.

Investment returns vary considerably making the effects of this factor very difficult to determine.  For someone who enters the system earlier in their career and then leaves, the ability for the SMP pension accounts to continue to grow and be combined with other retirement plan savings throughout their working years may be a benefit.  This could potentially favor the SMP.  Someone nearer the end of their career may benefit more from a guaranteed benefit not dependent on investment returns, but based on earnings history and length of service.  This may favor enrolling in the Traditional or Portable plans.


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, flexibility and portability of benefits may be more important than in the past. The Traditional plan has the least flexibility for departure.  Once vested (after 10 years), your only options after leaving are to wait and draw benefits at full retirement age or to take a refund of only your own contributions (credited a fixed 4.5% interest rate). Your employer matching contributions are forfeited if refunded in the Traditional plan.   A refund of your own contributions is the only option if you leave SURS with less than 10 years of service.

The Portable and SMP plan come with the ability to take the employer matching contributions with you when/if you leave the university SURS system.  Under the Portable plan, your refund is determined based on your contributions and the employer contributions plus an effective rate of interest determined periodically by SURS.  The SMP refund is also based on your and the employer contributions, plus or minus the actual performance of investments you selected. 

In the Portable and SMP plans, 5 years of service are required to vest and entitle you to take employer matching contributions.  Before taking any benefits, make sure you are aware of the tax consequences. These distributions may be paid directly to you or rolled to another qualified retirement plan. Finally, you may also forfeit retiree health insurance benefits in the event of taking or transferring a refund from all three plan types. 

Survivor Benefits

In exchange for reduced flexibility, the Traditional plan offers the most generous survivors 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. 

The Portable plan only offers a default survivors 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.

The SMP plan does not provide an automatic lifetime survivor’s 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 SMP account balance at that time.

Salary Cap

Current salary and future earning potential is another consideration when choosing a plan. Under current rules, the Traditional and Portable plans are only based on salary up to $111,571.63 (2017 limit, adjusted annually for inflation).  If you select one of these plans and exceed the salary 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.  

Those who have salaries in excess of the salary cap (or the potential to exceed the limit as future salary grows) may favor the SMP.  Under the SMP plan, contributions are based on earnings up to $270,000 (2017, adjusted per IRS rules). For example, a participant with annual earnings of $200,000 would gain an additional $6,720.56 in employer matching contributions per year (7.6% of the difference between $200,000 and $111,571.63) over the Traditional and Portable plan limits, as well as their own additional contributions of $7,074.26 (8% of earnings) above the two lower contribution limit plans.

Eligibility for Retirement Benefits (Annuity)

All three plans are designed to provide you a monthly stream of income throughout retirement called an Annuity.  You are entitled to a benefit in the Traditional and Portable plans when you have reached 10 years of service credit and have attained the age of 67.  You may draw as early as age 62 with reduction of benefits.   

For the SMP you may begin a retirement annuity at the age of 62 with 5 years of service credit, age 55 with 8 years of service credit, or any age with 30 years of service credit.  As benefits are based on your SMP account balance at the time, there is no reduction for early benefits.  However, you are purchasing a private annuity with a monthly benefit amount that will vary based on age and other factors you choose at retirement.

Final Notes

I’ll note that many clients consider the SMP plan a safe 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, SMP 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 SMP 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 with SURS earnings.  Even if you have a past earnings history in social security, your social security benefits may be reduced.  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 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.  The majority 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.


Guest Blogger: This post was co-written by Eric Schaefer, a senior studying Financial Planning at the University of Illinois.  Eric is working towards becoming a CERTIFIED FINANCIAL PLANNER™ and is currently an intern at Bluestem Financial Advisors, LLC.


Department of Labor Fiduciary Rule


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.

How to Navigate State Retiree Insurance when turning 65

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

Trail logo for website

Supreme Court Rules Illinois Pension Reforms Unconstitutional

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:

  • Shifting future pension costs to local governments and universities
  • Changing the way in which future pension benefits accrue
  • Moving from defined benefit type (pension) plans to defined contribution (401k style) plans

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.

Update on State Employee Retiree Health Insurance Premiums


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:

  1. Do Nothing Members who do nothing will receive their full premium refund (and possibly interest) less their proportionate share of legal fees for the class action lawsuit, Kanerva v. Weems, whose settlement resulted in the premium refund.
  2. Request to Opt-Out Members may notarize and submit an Opt-Out Notice. Members who opt-out would NOT be eligible to receive a refund of premiums as part of the class action settlement, their premium payments would be placed back in the Health Insurance Revolving Fund, and the member would be responsible for the legal expenses of any separate legal action. The Opt-Out Notice must be submitted by March 11, 2015.
  3. Members who do NOT opt-out, may object to the Legal Fees Members may send a written objection to the legal fees that are deducted from their pension refund. Members who object to the legal fees can be heard by the Sangamon County Court on April 1, 2015. Any objection must be submitted by March 11, 2015.

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.

Update on Illinois Pension Reform

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:

Pension Reform

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.

Health Insurance

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.

Further Clarification on Illinois Pension Reform

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.

Pensionable Earnings Limits

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.

Money Purchase Changes

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.

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:


  • 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.

A Simple Strategy to Maximize Open Enrollment

As the year draws to a close, days grow shorter, and the holiday bustle begins, there is one item many are dealing with – Open Enrollment.  This is often the time of year to review and elect changes to your employer benefits for the coming year.  Although this may not make your top 10 holiday task list, here is one helpful tip to maximize your election for the upcoming year: The days of employer pensions are past and today’s worker needs to take responsibility to secure a comfortable retirement.  According to the National Institute of Retirement Security, Americans are doing a poor job of it.  They report the median retirement account balance is only $3,000.  This is nowhere near the $1-2 million figure most professionals quote as needed to ensure financial independence.

Do yourself a favor and make one small change this year.  Increase your own retirement savings contribution by 1%.  You will hardly notice the change.  Assume you earn $40,000 per year and are paid bi-weekly.  An increase of 1% in savings means saving about $15 extra per pay period.  Plus, if you save to a pre-tax account such as an 401k or 403b, you will save tax.  Assuming an average federal and state income tax rate of 20%, your $15 contribution will only result in a paycheck decrease of $12.00 net of tax.  Would you even notice a change that small?

The chart below illustrates the power of increasing your retirement savings annually.  Barney and Eric are both 30 years old earning $40,000 per year.  They each have $3,000 in savings and are saving 5% of income per year.  Eric increases his savings rate by 1% per year until he hits 10% annual savings at age 36.  Assuming they each earn a 7% return on investments over their careers, Barney would end up with savings of $328,000 compared to Eric’s $580,000.

Comparison of Increasing Savings by 1%

Even though Eric is saving more, he probably does not notice much difference in lifestyle as compared to Barney.  Barney does have more discretionary income throughout his career, but he is likely spending it on goods and services that have little lasting value.  Because he is used to spending more than Eric, Barney needs 5% more annual retirement income.  This means he needs even more savings than Eric to maintain his lifestyle through retirement!  And, if Eric continues increasing savings by 1% each year until he is 41 to achieve 15% savings, he will have $741,000 at retirement.

If you are lucky, your employer might even offer the option to automatically increase your savings each year.  Choosing this election increases your retirement savings on an annual basis or when you get a pay raise.  According to Nudge by Richard H. Thaler and Cass R. Sunstein, these types of automatic options in plans can help you avoid the procrastination that is so common for all of us.

Even if your employer does not automatically adjust for you, you can easily setup a reminder on your Google Calendar.  Otherwise, you can hire me to be your “paid nag” and make sure you are on track to reach financial independence at your desired age!

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:

images[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.

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.