July 01, 2023

Clarifying Atrium Pension's Most Common Misconceptions

Why has the value of the Atrium Pension dropped over the past 18 months? This question has come up frequently recently, causing Atrium colleagues to express alarm about how much they’ve “lost” in the value of their pension. Over the almost 30 years I’ve worked with Atrium physicians and executives, the pension has consistently created the most confusion among participants. With this in mind, let’s take a deep dive into the plan to clear up misconceptions and answer some commonly asked questions.

How is the pension different from other retirement plans?

The main thing to consider about the Atrium Pension plan is that it’s a defined benefit plan, which means that what is defined is the benefit you get at retirement – a guaranteed income stream. Atrium takes the risk of how to invest pension funds (and how much to contribute to the plan) to provide that guaranteed income stream for you at retirement.

This is different from your 401(k) and ADVANTAGE accounts, which are defined contribution plans. For those plans, what is defined is what you can contribute. For example, this year we know that you can contribute up to $22,500 each to the 401(k) and ADVANTAGE plans ($30,000 if you’re 50 or over at any time during 2023). What you end up with at retirement depends entirely on how your investments do in those plans after you’ve made those contributions.

How is my guaranteed income stream determined?

The benefit you receive is based on years of service, compensation and age. The pension plan has been frozen since the end of 2017, so you are no longer receiving service and compensation credits. To complicate matters further, the traditional pension benefit was frozen for non-grandfathered participants effective Dec. 31, 2008. (For a further explanation of the different freezes over the past 15 years, check out Atrium’s FAQ document – start with no. 9 on page 2.)

How can I tell if I’m a non-grandfathered or grandfathered participant?

You’ll know if you’re non-grandfathered if the pension plan listing, which is usually on the second-to-last page of your quarterly Empower statement, looks like the one below. This screenshot was taken from a client’s Empower statement. (The client, we’ll call Jane, approved my use of it.)

March Statement

If you were grandfathered (see no. 18 of Atrium’s FAQ document), you’ll only have one line item showing a positive dollar figure in that section – “Value of Total Vested Balance as of 03/31/23 - $X,XXX,XXX”. Also, a grandfathered participant will show a pension value of $0 on the first page of their Empower statement, which has to be a little disconcerting considering those participants often have a lump sum pension value in excess of $1 million.

How can I calculate the value of my pension?

In the example above, the cash balance account is the $347,773 value (see no. 16 in Atrium’s FAQ document). The traditional account value is actually not spelled out here – you have to calculate it. To get that figure, you have to subtract the cash balance portion of $347,773 from the total vested balance ($1,214,857). So, in this instance, the traditional account value is $867,084. The total vested balance includes the cash balance account and an estimate of the traditional account value.

To make things even more confusing, the traditional account value isn’t even included in the value you see for the pension on the first page of your quarterly Empower statement. For example, this is how Jane’s pension value is expressed on the first page of her March 2023 statement:

March Pension

What is the lump sum value?

This lump sum value for the traditional account that you see on your statement (or online) is only an estimate of the lump sum necessary to produce the promised income stream at retirement. The inputs to calculate that lump sum are your life expectancy and current interest rates. If interest rates are low, it takes a larger sum of money to produce the income stream at retirement. The reverse is true when interest rates are high: It takes a smaller lump sum to produce that same income stream.

For example, assume the Atrium pension has guaranteed you an income stream of $100,000 per year for 20 years. If the assumed investment return (i.e., interest rate) is 10% annually, the current lump sum necessary to provide that income stream would be $851,356. Let’s say the assumed investment return is cut in half to 5% annually. The lump sum needed to provide that same income stream jumps considerably – to $1,246,221. Note that the $100,000 per year income stream hasn’t changed – just the lump sum required to produce it because of the change in interest rate inputs.

You can see from this example below taken from Jane’s December 2021 statement that her pension value was $1,388,820. As we did above, we can calculate that the traditional account value was $1,058,028 in December 2021 versus the $867,084 on the March 2023 statement. But you can see that since then, the cash balance portion has increased in value (from $330,792 to $347,773 above) – again, see no. 16 in Atrium’s FAQ document for the “Why?” behind this.

December Statement

So, what’s the real reason the traditional account value dropped?

In the examples, the traditional account value dropped by almost 20% between the end of 2021 and today. But why did this happen? At the end of 2021, the interest rates used in these calculations of the lump sum were very low: about 1%. By the end of 2022, the interest rates used in these calculations had jumped to almost 5%.

Keep in mind that throughout all of this, the amount of income Jane would receive at retirement hasn’t changed. For example, if Jane were due a lifetime income stream of $100,000 at age 65 when she looked at her lump sum balance at the end of 2021, she would still get that same $100,000 when she looks at that lower lump sum balance at the end of March 2023. In other words, the promised income stream isn’t affected by fluctuations in the financial markets and interest rates.

Do I have to take the lower lump sum distribution at retirement?

An Atrium retiree is not required to take the lump sum at retirement. They can simply elect instead to take the income stream that hasn’t been affected by fluctuating interest rates. A big part of what we do for our retiring Atrium clients is to determine how to maximize their retirement benefits – including the pension plan. That is, does it make sense to take an income stream or the lump sum? The answer depends on the client’s individual situation including his or her need for guaranteed income, life expectancy, tax considerations, strategic Roth conversion opportunities, expected charitable giving levels in retirement, and strategy for claiming Social Security, among other factors.

What happens to my pension if I die before retiring/severing?

The cash balance portion of your pension plan can be left to the beneficiary (or beneficiaries) of your choosing, but you have to submit a beneficiary designation form for that piece.

There is no participant-directed beneficiary designation option for the traditional benefit of your pension if you are under the age of 65. If you are married and die before retiring/severing, your spouse would receive 50% of the accrued traditional benefit. If you die as a nonmarried participant, there is no death benefit. That is, there is nothing left to your estate from the traditional pension.

If you are still working at age 65, you are then allowed to select beneficiaries for the traditional benefit and your estate or heirs would receive 100% of the accrued benefit.

We’ve found that many single participants at Atrium are unaware that the value of their traditional pension would be lost at death and have therefore not factored that into their estate planning.

Have additional questions? Please reach out.

If you have further questions about your Atrium pension or how to maximize your retirement benefits, we’d love to speak with you. Please drop me an email at bfenn@buckinghamgroup.com or set up a meeting with the Buckingham Charlotte team.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Certain information is based on third-party data and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. R-23-5941

About the Author

Brian Fenn

Wealth Advisor

Brian has always had a knack for numbers and connecting with people. Early on he realized the financial planning world was the perfect match for him; providing an avenue to combine his math brain with his passion for helping others. As a wealth advisor, he finds helping improve the quality of his clients’ lives beyond just a monetary value to be incredibly rewarding. Providing clients peace of mind while building lasting, meaningful relationships has been a truly invaluable aspect of his career.

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