Update on Illinois Retiree Insurance

We have heard from many of our clients regarding concerns over the change in Insurance Providers for State of Illinois Medicare-Eligible Retirees. With so many clients impacted by this change, we have been following the news. Here is what we know so far and what we are recommending.
 
Starting with what we know, it is not much. We wrote up a short piece on our website on this a few weeks back, which you can read here. The major concern at this time is that Carle has not come to an agreement with the Advantage Plan Provider, Aetna. This means that Carle providers and facilities are not in-network for the new plan effective January 1, 2023. While the new plan is a PPO and should allow you to see out-of-network doctors, these services may not be covered if the provider is unwilling to bill through Aetna.
 
As far as we can tell, conversations between Carle and Aetna are ongoing and there is a possibility that an agreement will be reached before the new plan year. This would not be unprecedented. A similar process unfolded about 10 years ago when Health Alliance was dropped in favor of UnitedHealthcare. Recent comments from Carle and Aetna representatives may be more attempts to rally public pressure for negotiations than statements of actual status of negotiations.
 
The unfortunate part is this leaves a lot of uncertainty for current plan participants. Here is what we are recommending:
 
If you are currently undergoing treatment for chronic or critical medical issues and absolutely cannot switch doctors, be prepared to switch to a private policy:

• November 30th – Deadline to opt out of the TRAIL / State of Illinois Medicare Plan

• December 7th – Deadline for Medicare Open Enrollment to select your own private plan

• Research Alternative Plans - Medicare's Website is the best resource as you can narrow in to providers covered in your area.

  • Private policies generally run $50-175/month/person, but can be higher or lower depending on deductible, co-pays, etc.

  • Inputting your current prescriptions will provide you a better total out of pocket cost estimate.

  • Pay attention to vision and dental coverage.

For everyone else, it is probably best to take a wait-and-see approach. If Carle and Aetna reach an eleventh hour agreement, you avoid all the hassle of unenrolling and reenrolling from TRAIL next year. If they do not reach an agreement, you could also unenroll from TRAIL during the next enrollment period near the end of 2023.

Insurance Changes for Illinois State Retiree 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:

Why is this change happening?

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.

Can I maintain my current Medicare Advantage Plan Provider?

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.

What if I am not Medicare Eligible?

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.

What is a Medicare Advantage Plan?

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.

Do I pay Medicare Premiums if I am enrolled in a Medicare Advantage Plan?

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:

What’s Next for Me?  

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.

Further Reading and Sources:

•         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 SURS Plan for You

Abstract

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

Introduction

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!

An Overview of the Options

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

How Salary Impacts your Choice

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.

Example 1 – Pension Under Traditional Plan

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.

Example 2 – Pension Under RSP

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.

Example 3 – Supplemental Savings

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.

Investment Control

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.

Vesting & Flexibility

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.

Survivor & Legacy 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. 

Example 4 – Survivor Benefits, Traditional

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.

Example 5 – Survivor Benefits, Portable

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.

FINAL NOTES

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. 

CONCLUSION

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!

Further Reading

SURS Traditional - SURS Traditional Guide

SURS Portable - SURS Portable Guide

SURS Retirement Savings Plan - SURS RSP Guide

Sources

[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.

An Analysis of the SURS Retirement Savings Plan

In fall of 2020, the State University Retirement System (SURS) rolled out the newly rebranded SURS Retirement Savings Plan (RSP). A revamp of the existing SURS Self-Managed Plan, these changes extended beyond a new name to include a different plan administrator, new investment option lineup, and an additional income option for retirees. We have spent the last 6+ months diving into the details of the plan and writing the following paper to present our findings.

You may download the paper below.

Link to Whitepaper

Executive Summary:

It is clear from our research this new plan is extremely complicated. One of the biggest changes is SURS outsourcing a major component of the plan to a third-party company, Voya. In our experience, even the SURS call center employees are not fully trained on the inner workings of the new plan or its features. In some cases, we were referred to Voya representatives to answer questions.

The paper present education and details about the new plan as follows:

1. An overview of retiree health insurance benefits as a SURS retiree, including under the new RSP.

2. A detailed analysis of the new income option for the RSP, the Secure Income Plan.

3. A decision tree of factors that may influence whether to utilize the Secure Income Plan vs. an Annuity.

4. Commentary from us regarding this change and the rollout by SURS.

Disclosures

This was written to supplement the planning decisions we make with our ongoing clients in the context of a broader financial plan. We are providing this to the general public as educational materials. We would caution any reader that the SURS plan, including this new RSP, is very complex. We could not possibly cover every possible situation or consideration in this document. You should consult other advisors regarding tax, investment, and other financial implications before making an irrevocable decision. You should not rely solely on this document for any decisions regarding your SURS plan. While we believe the information in this report to be factual, we cannot guarantee it. We did cite sources whenever facts are presented. As representatives of SURS and/or Voya would not provide full details of plan features, the paper also describes when assumptions or estimates were used.

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. 

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.

Tax Cuts and Jobs Act of 2017

As you may have seen, the House and Senate have reconciled a final version of the Tax Cuts and Jobs Act of 2017 which President Trump signed into law this morning. While the bill has been signed it is important to note that additional time will be needed for full interpretation and adjustments as corrections and revisions are expected.

While a significant portion of tax changes relates to business organizations, many changes will affect individual taxpayers, as well. With such a major restructuring, it will likely take months for all of the changes to be ironed out. 

Tax Brackets: The revised tax plan retains a 7 bracket tax system as proposed by the Senate. Most of the brackets enjoy a decreased rate, although the ranges of taxable income that define each bracket have been significantly adjusted. Below are the new tax rates compared to 2017. The table can be used to estimate how your tax rate may change in 2018.

Outcomes: It is nearly impossible to generalize who will see increases or decreases by this change alone.  High-income couples will see some relief from the so called “marriage penalty”, up to $600,000 of taxable income.  Otherwise, you will need to reference the following changes to fully gauge impact on your taxable income (impacting how these rate changes affect you).  Many people will see lower overall rates, but loss of deductions may increase others overall tax liability. 

Standard Deduction and Personal Exemptions: The standard deduction for all taxpayers has nearly doubled from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples. However, simultaneously is an elimination of personal exemptions of $4,050 per family member.

Outcome: An increased standard deduction will limit the benefit for many taxpayers to itemize deductions. Individuals and married couples with no kids and minimal itemized deductions may see a slight decrease in tax, while larger families may see higher tax due to the loss of personal exemptions.  Keep in mind, changes to the Alternative Minimum Tax (AMT) may impact these changes for your situation.

Child Tax Credit: The Child Tax Credit is being expanded with an increase from $1,000 to $2,000 per qualifying child under 17. Also, the income phaseout levels are increased from $75,000 to $200,000 for individuals and $110,000 to $400,000 for married filing jointly. Additionally, a new credit of $500 has been added for qualified dependents that are not qualifying children (children 17 and older or non-child dependents such as parent).

Outcome: Intended to make up for the lost benefit of personal exemptions, individual results may vary based on family size, age of dependents, etc.  Higher income taxpayers may benefit the most as they may have previously seen no benefit from personal exemptions due to AMT while now being eligible for the expanded Child Tax Credit.

Itemized Deductions

Mortgage Interest Deduction: For new mortgage contracts following December 15, 2017, the deductibility of interest on a primary residence will be limited to the first $750,000 of debt principal, as opposed to the current limit of $1,000,000. Interest deductibility on Home Equity Lines of Credit (HELOC) will be eliminated for existing and new loans when funds are not used to buy, build, or significantly improve the primary residence.

Outcome:  Mortgage and HELOC interest remains a useful tax strategy for many taxpayers that will still be itemizing. We will simply need to be extra diligent about keeping record of how HELOC funds are used.

Charitable Contributions: While relatively unchanged, the limit for deducting cash donations to charities is being increased from 50% to 60% of Adjusted Gross Income. 

Outcome: With the increased standard deduction, more individuals may see a benefit in “bunching” their charitable gifts on an every-other-year strategy. 

State and Local Tax Deduction: Originally, both the Senate and the House looked to either eliminate or severely reduce these deductions. The final version of the bill allows both deductions but at a combined cap of $10,000. The cap is the same for both individual and married filing jointly returns. Furthermore, any pre-paid 2018 State income tax will not be allowed on 2017 tax returns.

Outcome: The cap on these deductions may limit the benefitting of itemizing deductions for some taxpayers, especially in the greater context of all the changes going into effect. Some people may benefit from pre-paying certain taxes before 12/31/2017.  If you make estimated tax payments, you might benefit from pre-paying your 4th Quarter State estimated tax payment before the end of 2017.  For those of you who live in a county that accepts prepayments for real estate taxes, you may also benefit from pre-paying your real estate taxes.  Please note, many high-income taxpayers subject to AMT may not benefit the prepaying strategies.  However, those same taxpayers will not also see a tax increase due to changes as their deductibility was already limited.

Medical Expense Deduction: Surprisingly, the medical expenses deduction will be temporarily expanded. For tax year 2018 and retroactively for 2017, the AGI threshold for this deduction will be reduced from 10% to 7.5%. An additional adjustment allows taxpayers affected by AMT to still enjoy the 7.5% threshold so that they can receive the benefit of this deduction, as well.

Outcome: Some taxpayers who previously thought their medical expenses were too low in 2017 for deducting might find they are in fact eligible.  If you anticipate major expenses in 2017 or 2018, timing any other discretionary (deductible) medical spending into the same year may be beneficial.

Miscellaneous Itemized Deductions: All miscellaneous itemized deductions that were otherwise subject to the 2%-of-AGI floor have been eliminated. Some of the most common deductions that will be lost are as follows:

• Unreimbursed Employee Expenses, including Office in the Home (not for self-employed)
• Tax Preparation Fees & Investment Fees (including Bluestem fees)
• Safe-Deposit Box Fees

Outcome: In some cases, you may benefit from accelerating these deductions normally paid in 2018 by pre-paying by December 31st of this year. Note, this strategy may not apply to those subject to AMT in 2017.

TIAA Changes More Than Just Its Name

Written by Karen Folk, CFP®, Ph.D., Founder & Advisor Emeritus of Bluestem Financial Advisors

Overview

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? 

Conclusion

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.  

Protect Your Identity Following the Equifax Security Breach

Data security has been a hot issue for some time, however, the latest security breach at Equifax has left nearly half of all Americans exposed. In the wake of this troubling incident, many of us are left with questions pondering the safety of our personal information, and even our identity.

How could this security breach have happened?

Unfortunately, the best information we have received from Equifax is that the breach was due to a “website vulnerability”. What exactly this means is anyone’s guess. The important issue now is for all of us to protect ourselves in the safest manner possible.

What can someone do with my personal information?

To name a few of the numerous and frightening possibilities, an identity thief can open a line of credit, take out a prescription, and obtain a driver’s license. The results of the above theft include a ruined credit score, altered medical history, and costly tickets that could lead to a warrant for your arrest. This may sound very doom and gloom, but it’s a good reminder to stay alert and vigilant on all fronts.  

What are the odds my identity would be stolen?

The likelihood of becoming a victim of identity theft may not appear to be very high. However, according to a recent USA Today article, 2016 saw a record rate of identity theft - about 1 in every 16 U.S. adults were victims¹. With the sheer volume of data stolen in the recent breach, one can only expect this number to rise in the coming years. Unfortunately, it has increasingly become a question of not if, but when one may be affected by identity theft. Nevertheless, there are several actions available to keep your identity as safe as possible.

To begin, Equifax has offered one year of free credit monitoring service to all individuals, the details of which you can review here. There has been concern raised regarding your ability to pursue legal action against Equifax if you accept this service. In a 9/11/17 update from Equifax, they state that enrolling does not waive any rights to take legal action, and that language on the contrary has been removed from their Terms of Use. However, if you are uncomfortable enrolling with in Equifax’s credit monitoring, see our three trusted steps below. Then continue reading for our general security tips. For maximum protection and security, complete all steps as often as recommended.

First: Routinely check your credit reports and account activity

• Free copies of your credit report are available once a year from each of the three main credit reporting agencies – Equifax, Experian, and TransUnion. They can be requested online here. Review these reports at intervals throughout the year. If any unusual activity is found, contact the credit agency immediately. As a service to our clients, Bluestem requests these free reports on a rotating schedule each year.
• Take some time to review bank and credit card statements once a month. Contact the financial institution if you do not recognize any transactions, no matter how small.

Second: Place a Fraud Alert on your credit reports

• Contact any one of the three credit agencies to inform them you are concerned about becoming a victim of identity theft and ask for a fraud alert. That agency must forward the alert to the other two agencies.
• The alert will require any third party to take measures to confirm your identity before opening any new accounts in your name. This should include contacting you.
• The alert will last for 90 days and can be renewed as many times as you would like. It is a free service.
• If you have already been a victim of identity theft, you can request an extended fraud alert that lasts for 7 years. Alternatively, if you are in active duty with the military, you can request a fraud alert for 1 year to protect you while deployed.

Third: Place a Credit Freeze on your credit reports

• While once thought of as an extreme measure to protect your identity, a credit freeze may be the best way to protect against identity theft given the likelihood your personal information was stolen in the recent breach.
• When placing a credit freeze, you must complete with all three credit agencies separately. When needing to apply for a legitimate credit account, you will have to unfreeze your credit report with all three agencies.
• There is typically a fee for both freezing and unfreezing your credit report, ranging from $3 to $10. The fee differs by credit agency, as well as by state. It is free for victims of identity theft and for individuals 65 years of age or older.
• The three credit agencies also have credit report products that are intended to help you control your credit. Be wary, however, as these products typically cost a monthly subscription fee which can become quite expensive.

Contact information for the Credit Reporting Agencies

TransUnion
1-800-680-7289

Experian
1-888-397-3742

Equifax
1-888-766-0008

General Safety Tips

• Fraudulent tax return filings have been on the rise. A good way to prevent this is to file your return early. The best protection is to obtain an IRS Identity Protection (IP) PIN number. Unfortunately, not everyone is eligible for an IP PIN; you must have either been a victim of identity theft or received a CP01A notice from the IRS. If you do apply for an IP PIN, remember that it will be required to file your tax return each year.
• Update passwords regularly, make them complex, and avoid using the same password for multiple logins. Consider using a password manager such as LastPass to help with password management.
• When available, use dual factor or multi factor authentication to the greatest degree possible. This ensures that even if your password is hacked you will have an additional layer of security.
• Do not send sensitive information such as account numbers or social security numbers via email.
• Be cautious of links included in emails. Do not click on links in emails or enter your credentials in pages linked from an unknown sender. Instead, go directly to the website and manually type the address or search on the site. 
• Do not use security questions that have easily searchable or generic answers.
• Do not use public Wi-Fi if at all possible. Hackers can use software that captures every character you type. It is best practice to never access secure websites or email on a public Wi-Fi network.
• If you store any sensitive information such as social security numbers, credit card numbers, account numbers, etc., in external storage devices, ensure that the data is encrypted and in securely password-protected documents.

If you have been the victim of identity theft visit the Federal Trade Commission’s ID Theft website for thorough tips on how to respond.

___________________________________________________________

1 USA Today article by author Bob Sullivan and published on February 6, 2017. (https://www.usatoday.com/story/money/personalfinance/2017/02/06/identity-theft-hit-all-time-high-2016/97398548/).

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. 

Paying too much in taxes? Find a tax-focused financial planner

The following post is shared content from the Alliance of Comprehensive Planners. 

Tax-focused financial planning is not just for the one percent. On the contrary taxes are the hub of the financial wheel with consequences to virtually all financial decisions. Under-planning and overpaying simply delays financial independence. So, why don’t more Americans engage in tax-focused financial planning?

The disconnect between financial planning and tax planning is costing American taxpayers dearly. Aside from the many who intentionally allow higher withholding throughout the year just to claim a sizeable refund in April, are those who overlook the tax implications of their retirement distributions, investment allocations, estate planning decisions or education savings. All have tax liabilities attached, either in the short or long term.

Accountants and tax preparers might identify those consequences in hindsight, when it’s too late to avoid tax penalties. And, financial advisors,who often simply state, “consult your tax advisor” are just washing their hands of the tax consequences of their advice, leaving it up their client to connect the dots. Indeed, it is this short-sighted, often rear view, of taxes as a once-a-year task, rather than a pervasive feature of financial life, that makes the tax-focused financial planner uniquely positioned to advise clients in all aspects of their financial lives.

“All aspects” is a hefty claim. Yet, tax-focused financial planners are informed not only by their clients’ financial profile, but also by the real context and implications of their advice. Cash flow and financial behaviors, the expectations for children and demands of aging parents, job security and income growth are as important as retirement planning, investment strategy and the tax consequences for the all-of-it. It’s holistic. It’s fiduciary based. And, it’s decidedly uncommon.

Focusing on history, is as bad as ignoring it, and tax preparation is often just that: passive and backward-looking. Tax planning is anticipatory, active and looks forward, sometimes even beyond the current year to future years.

Those knee-deep in regret over the tax return they’re filing in April, might reconsider their approach for 2017. With a tax-focused financial planner, planning for their 2017 tax return would already be underway.

To read more on the subject of tax-focused financial planning check out the Tax Alpha White Paper written by fellow ACP Advisors Jonathan Heller and Robert Walsh (edited by Bluestem’s very own Karen Folk and Jake Kuebler). For more information on the Alliance of Comprehensive Planners visit their website at www.acplanners.org.

In Case of Emergency

Guest Blogger: This post was written by Eric Schaefer, a senior studying Financial Planning at the University of Illinois.  Eric is working towards becoming a Certified Financial Planner. He serves as President of U of I’s Financial Planning Club and is currently an intern at Bluestem Financial Advisors, LLC.

One of the cornerstones of a financial plan is protecting against the unexpected. We often address this through purchasing adequate life insurance coverage, maintaining proper emergency reserves (“ready cash”) and developing a thoroughly diversified investment portfolio. However, many overlook planning for unexpected financial events, especially those that may be particularly unpleasing.  One such topic is, have you and your family thought about what you would do in the event of an unexpected medical emergency?

Following up on the HIPPA authorization article featured in our Fall Newsletter (Click Here to Subscribe), we would like to elaborate a bit further on the importance of having a medical emergency plan by highlighting a few key actions items to consider:

1.) To ensure family can get updates on you during a medical emergency, make sure that your HIPPA privacy forms are filled out completely and with the necessary signatures. Parents, if you have an adult child or student away at school, make sure they complete and sign the HIPPA form as well.  You may also want to complete clinic specific authorization forms at their campus medical facilities. This will ensure that no matter where they receive emergency treatment you will have the appropriate access to their records and care providers. 

2.) Upon admittance to the hospital, if the patient is unconscious the staff will first look for an EMERGENCY CONTACT card in a purse or wallet and/or check for an “in case of emergency” (ICE) contact in their phone. Modern cell phones often allow ICE contacts that can be accessed while our phone is locked.  Some add on applications can also digitally display a Medical ID card from the lock screen. 

If you aren’t the best with technology that’s OK! This would be a great opportunity for your children to show you by setting up their own digital ID on their phone. It’s also not a bad way to kill two birds with one stone. Additional information on how to set up and where to find these applications is listed below.

In the event that you either do not have a smart phone or would prefer to use a more traditional method for confirming your identification, there are many websites with Medical ID card templates that you can print out. Those with chronic conditions, allergies, or who are fashion oriented may consider Medical Emergency ID jewelry. What better gift to get your significant other, son or daughter than a necklace with their blood type and YOUR name and phone number on it?

3.) The alternative to carrying Medical ID cards or filling out numerous forms at different healthcare facilities would be to have a medical power of attorney, also referred to as an advanced healthcare directive. This is the most effective of all the options mentioned and an essential item in your estate plan. These medical power of attorney documents are state specific, so you will want to be sure to fill out the appropriate version for where your child plans to spend the majority of their time. Not only will this compliment a comprehensive medical emergency plan, but it will also afford your children the opportunity to begin thinking about and discussing with you the importance of life planning and determining what is truly important to them.

Here at Bluestem we would like to encourage all of you to address your physical well-being with the same careful and considerate preparation as you do with your financial well-being. Hopefully you nor your family members will ever be in a situation where you must utilize any of the items mentioned above, but in the event that you are, we hope that this post will have helped you make the necessary arrangements.

Additional Resources:

ACP Fall 2016 Newsletter

iPhone Medical ID & ICE Setup

ICE Setup for Any Smartphone Platform

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.

Do you have the right records for Charitable Gifts?

For most of us, getting organized to complete our annual Income Tax Return is a chore. We would prefer to expend the minimum amount of effort to get the job done. Luckily, many records such as income figures are provided to us by others (W-2’s, 1099’s etc). In addition, minimizing your taxes due often involves documenting charitable gifts for itemized deductions. Maximizing the benefits from those charitable gifts does require a bit more work on your part. While you may be aware that you need to keep records to deduct charitable gifts you make, you may not realize that it is fairly common not to receive IRS-compliant documentation from nonprofit organizations. Therefore, it is up to you to know the rules yourself and confirm you receive the correct documents. Below is an outline of what to keep when you make Charitable Gifts (by donating Cash, Check, via Credit Card, etc): For Gifts under $250: You need to have a record showing the name of the organization, date and amount of the contribution. One or the other of these will work:

1. Bank Record such as cancelled check, bank or credit card statement, or
2. A receipt from the organization

This means gifts such as putting cash in the Salvation Army Red Bucket are not deductible.

For Gifts of $250 or more: In addition to the record showing the name of the organization, date and amount of the contribution described above, you also need a written acknowledgement from the charity that meets all three of the following requirements:

1. The acknowledgement includes the amount of the contribution. and
2. It states if any goods or services were received by you in exchange for the gift. (Note: this is required even if no goods or services were received; this is the most commonly missed item we see on charity acknowledgement letters.) and
3. The written acknowledgement needs to be received before you file your tax return.

There are documented court cases in which the IRS disallowed deductions made for charitable gifts that would have qualified as deductions, but proper documentation was not provided to the taxpayer by the charitable organization. If you are missing any of the information above, you should reach out to the organization. They may not even be aware of the reporting requirements themselves, especially for a small, volunteer run charity.

For non-cash gifts such as donations of personal items or household goods, shares of investment securities, etc, there are additional recordkeeping requirements to follow. Please be sure to consult IRS Publication 526 or contact us to learn more.

Student Loan Forgiveness for University Employees

Guest Blogger: This post was written by Mary Carroll, a senior studying Financial Planning at the University of Illinois.  Mary is working towards becoming a Certified Financial Planner. She serves as President of U of I’s Financial Planning Club and is currently an intern at Bluestem Financial Advisors, LLC. One of the biggest fears students have is getting a zero on an assignment. There are times however when the goal of the assignment IS to get a zero. That’s right, you may be able to zero out your student loan debt in five steps. This assignment may not be an “Easy A”– but it could save you thousands on your student loan repayment.

Before we jump into the five steps, a quick history lesson: In 2007, President Obama signed into law the Public Service Loan Forgiveness (PSLF) program to ease the overwhelming student loan burden for many entering full-time public service jobs, often at lower pay than in private sector jobs. PSLF is designed to forgive the remaining balance (and accumulated interest) on federal student loans for certain borrowers after they have made 120 qualifying payments while employed full time by certain public service employers.

There are five “Rights” to Student Loan Forgiveness to ensure you don’t get it “Wrong”:

1) The Right Loan: applies to Federal Direct Loans ONLY. Direct Loans include subsidized and unsubsidized Stafford loans, PLUS loans, and Direct Consolidation Loans. This program does not apply to any private student loans.

2) The Right Repayment Plan: You must be using one of three repayment plans that base payments on income: • Pay-As-You-Earn (PAYE) or Revised Pay-As-You-Earn (REPAYE) • Income-Based Repayment (IBR) • Income-Contingent Repayment (ICR)

3) The Right Kind of Employment: Full-time employees at Universities (that are not-for-profit) and tax-exempt organizations under section 401(c)(3), such as the University of Illinois, qualify you! “What qualifies as full-time employment?” Is a common question. The answer is an average of 30 hours per week for the year. As a teacher (or other employee) under contract for at least 8 months for the year, you meet the “full-time standard” if you work an average of at least 30 hours per week during your contractual period. Additionally, the PSLF program applies to other jobs besides University Employees. Qualifying public service employment in the government, a 501(c)(3) nonprofit organization, full-time AmeriCorps position, the Peace Corps, or a private “public service organization” qualify you as well.

4) The Right Number of Payments: Rinse, lather, and repeat 120 times (once a month for ten years). The only payments that count are payments that you have made while doing Steps 1-3 any time after October 1, 2007. This means that payments made before electing an income-based payment plan and prior to beginning public service work, won’t count toward the 120 number you need. Payments must also be made on-time (meaning no later than 15 days after their due date).

5) The Right Documentation: Show your work!! How many times do you have to tell your students that one? Show your work and turn in an employment certification form periodically to the Department of Education. They will let you know if you are on the right track to receive loan forgiveness. You don’t want to get to the end of your 120 payments only to learn you messed something up!

An added bonus point to the assignment: Typically, when a debt is forgiven the IRS includes the amount forgiven as taxable income in the tax year the loan is forgiven. However, any amount forgiven at the end of the 10 years due to the PSLF program is forgiven tax-free. This means you avoid paying federal income tax on the amount forgiven, which is an additional savings! Thank you, teacher!!

Don’t be tardy – start on these 5 steps today!

For more information check out the resources provided below.

Unsure of what type of loan you have? Visit: https://studentaid.ed.gov/sa/?login=true Income Drive Repayment Plans: https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven Employment Certification Form: https://studentaid.ed.gov/sa/sites/default/files/public-service-employment-certification-form.pdf https://studentaid.ed.gov/sa/sites/default/files/public-service-loan-forgiveness.pdf https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service#qualifying-payment

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.

Illinois Department of Central Management Services

Cycle of Market Emotions

You are probably aware of the stock market activity over the past week. Friday saw the largest drop of the week, rounding out weekly losses in the 5-6% range. This, in turn, fueled massive negative media coverage over the weekend. No doubt, the negative news adds to fears and is one of many factors leading to further losses in the market. As usual, we encourage you to hold steady through the current market gyrations. One soundbite repeated over the weekend news cycle is that the market has not seen a single day drop like Friday’s since 2011. Do you remember which day it was? My guess is that, unless the last drop significantly affected your life or financial plans, the answer is no. The uncertainty of the future can be scary. Our natural first reaction is fear and trying to avoid further losses. Our brains are hardwired to react this way. However, acting on this emotion would be a mistake. It would lead to selling when the market is low, when in reality, that is the complete opposite of the approach you should be taking. The chart below illustrates this.

I predict one of two possible outcomes of the market in the next year:

1. The market will continue to decline as the world economy sorts through its current concerns. For our retiree clients, they will ride the downturn relying on the safety of their bond ladders without fear of where their next paycheck is coming from. For our working clients, they will keep working, contributing regularly into the market and buying stocks while they are on fire sale. Over the long term, the market will recover!

2. The market will recover in the next few weeks and we will quickly forget about the conditions of the past week.

Cycles such as the one we are currently experiencing are part of investing. Doing nothing when the market is getting a little haywire may seem counterintuitive or that we are avoiding the problem. The reality is that sticking to a long term plan through market changes takes resolve and commitment to the stated investment goals. Fighting instinct is hard, but doing so leads to better investment performance in the long run and, more importantly, a better chance of realizing your financial goals.

Sorting out Maximization versus Optimization

Financial Planning is often thought of as a quantitative field. Planning is done to answer questions such as how much should I be saving, how should I invest or how can I reduce my tax liability. Numbers are collected, plugged into a formula and out comes a result. When questions are answered individually, solutions can be maximized to seek the best result. For example, maximizing portfolio returns might be done by gathering facts about time horizon (period of time funds will be invested), risk tolerance (how much risk you are willing to take), and investment choices (what choices are available in your investment plan). The problem with maximizing is you are often constrained to looking at a single piece of a larger financial picture. Are your choices about investing impacting your tax situation? Are immediate financial goals competing with longer term goals? Taking a comprehensive approach to planning can help here by taking time to understand the bigger financial picture. Where are the trade offs between decisions? How will one decision affect another? How do you balance a series of choices that all impact each other?

This is how I would define Comprehensive Financial Planning. Working with an advisor knowledgeable in multiple areas of finances; taxes, insurance, investing, retirement, and so on. The advisor working with you to create a plan considering how each area will impact the other. Comprehensive Planning can achieve good results, but can it achieve the Optimal Results?

Sometimes planning hits a wall where the best recommendation conflicts with what you are willing to change. The best answer is not always the most acceptable answer. To reach a goal under current circumstances, perhaps the best answer is to work longer, work more, spend less, delay satisfaction and save more. In reality, finances are really just a tool used to achieve life goals. Sometimes, it is better to adjust the goal than to adjust the financial situation.

The following is an illustration we often use with clients. It shows many values one might hold in their life. In each area, we ask them to rank how satisfied they are, by placing a dot to represent the level. The innermost circle represents low satisfaction and the outermost represents complete satisfaction. The ultimate goal is to balance each area out so that when you connect the dots, they form a truer circle.

In Example 1, the person is very out of balance. A lot of time and energy might be focused on career, giving a lot of satisfaction in that area plus leading to financial security, but leaving insufficient time for family and social activities. In the planning realm, decisions might need to be made to correct this imbalance. With this illustration, it might become clear that some financial goals can be sacrificed in exchange for other life goals.  To reach Example 2, it would be more acceptable to cut work hours, save less, but have more time to devote in the areas of social and family activities. 

It is not uncommon for our clients to begin to see these trade offs. When you reach financial independence, choices becomes less about accumulating more. Instead, focus shifts to using money to do things like buy time (outsourcing housekeeping or yard work to free up time to be spent with family). Or, maybe the career becomes less important as salary or advancement opportunities are forgone in exchange for time to focus on social endeavors.

To me, this is the process of Optimizing a financial plan. Taking the time to step back and see the big life picture. Not only making the right financial choice, but making the best use of financial resources to achieve all of life’s goals. If you are ready to optimize your life, contact us today.

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.

Identity Theft Actions

In a previous Blog post, Protecting Your Financial Life in the Digital Age, we discussed ways to protect yourself against identity theft. While it is important to take all the precautions you can to protect yourself it is also important to know what to do if you should fall victim to identity theft. Below are several actions to take if you find your identity has been compromised. Action 1: At a minimum, you should place a fraud alert with the three Credit Reporting Agencies.  This should limit a potential thief’s ability to establish new credit in your name.  Complete instructions can be found with this link.

For added protection, consider freezing your credit. This will limit any new credit from being established under your name while the freeze is in effect.

To freeze your credit, contact each of the nationwide credit reporting agencies:

• Equifax — 1‑800‑525‑6285
• Experian —1‑888‑397‑3742
• TransUnion — 1‑800‑680‑7289

You'll need to supply your name, address, date of birth, Social Security number and other personal information. Fees vary based on where you live, but commonly range from $5 to $10. This fee may be waived with a verification that you are a victim of identity theft.

After receiving your freeze request, each credit reporting agency will send you a confirmation letter containing a unique PIN (personal identification number) or password. Keep the PIN or password in a safe place. You will need it if you choose to lift the freeze.

Action 2: Request credit reports from at least one of the three Credit Reporting Agencies.  Review your report for any lines of credit that you don’t recognize.  The report will have instructions on disputing your account if needed.  Reports may be accessed for free at www.AnnualCreditReport.com.

Action 3: Contact custodians of your bank and investment accounts to inform them of your identity theft.  Banks may assign new account or credit card numbers.  Investment custodians may flag your account to avoid distributions of funds without additional steps to authenticate requests.

Action 4: Consider filing a Police Report and an Identity Theft Complaint with the Federal Trade Commission (link here).  Document all communication with banks and financial institutions.  Keep dated notes of phone calls and copies of all correspondence.  Official disputes should be in writing and sent with tracking (such as certified mail with a return receipt).

Action 5: If you are victim of Tax related fraud, also consider these steps.

Generally you will need to file a paper tax return.  Along with the return, Form 14039 – Identity Theft Affidavit will need to be attached to alert the IRS of the fraudulent activity.  For subsequent years once your identity has been authenticated, the IRS will provide you a PIN Number to file future returns electronically.

Consider requesting a tax transcript to see what return was filed under your social security number.  This can be done at http://www.irs.gov/Individuals/Get-Transcript.

Consider reviewing your Social Security statement to ensure that your earnings history is reported correctly.  This can be done at http://www.ssa.gov/.