State Universities Retirement System

Participants in the State Universities Retirement System (SURS) in Illinois once had to choose between annuitizing 100% of their 401(a) plan balance at retirement or taking a lump-sum distribution. The many who wanted to annuitize only part of their balance could not do so in the plan.

Annuitizing 100% meant not only that a retiree would give up access to his money, but in a long-term environment of low interest rates, the whole balance would provide low income. Alternatively, taking a lump sum meant that retirees would have to figure out how to make it last for the rest of their lives. “A primary driver for us was to create a solution that would resolve that problem,” says Suzanne Mayer, interim executive director and chief benefits officer, in SURS’ main office, in Champaign, Illinois.

This past September, the system shifted to partnering with AllianceBernstein L.P. on a custom lifecycle solution dubbed the SURS Lifetime Income Strategy (LIS). The LIS serves as the default 401(a) plan investment for both accumulation and decumulation. SURS also switched to Voya as recordkeeper, in part because of the provider’s ability to recordkeep the LIS.

“We’ve been a defined benefit [DB] plan sponsor for 75-plus years, and we’re trying to offer something similar to the lifetime income of a DB plan, in the DC [defined contribution] plan,” says SURS Chief Investment Officer (CIO) Doug Wesley. Retiring participants no longer must take a distribution: SURS realized they will likely get a better deal if they stay in the plan and benefit from its institutional pricing, instead of taking their money out and paying retail fees, he says.

As of this past December, following a re-enrollment of participants—allowing for opt-outs—into the LIS, that new default held 84% of the 401(a) plan’s assets. New SURS hires may choose to go into the defined benefit plan or the 401(a) plan; those who choose the DC plan automatically transfer into the LIS unless they make another investment election.

The default setup is that, when a participant turns 50, his assets begin a 15-year transition from the target-date fund (TDF) to a Secure Income Portfolio; he retires at 65 with 100% of his assets in the latter, from which he starts to receive monthly guaranteed-income payouts. The investment fee a participant pays adjusts during the transition period, proportionately shifting as the assets shift from one investment to the other.

Members have two major levers they may customize, based on their needs: their projected retirement age, which affects when the portfolio transition begins, and the percentage of their account that they want converted to lifetime income. A participant also has the option to not utilize the Secure Income Portfolio and simply remain invested in a target-date fund. “They can control when, and how much, they buy into the Secure Income Portfolio over time,” Mayer says. “But if they default into the LIS, they can make zero decisions, and still automatically be on this path to guaranteed lifetime income.”

—Judy Ward