Quantcast
The MFWire
Manage Email Alerts | Sponsorships | About MFWire | Who We Are

Subscribe to MFWire.com's News Alerts [click]

Rating:Fido Thinks Long-Term Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, March 6, 2003

Fido Thinks Long-Term

by: Sean Hanna, Editor in Chief

Should plan sponsors be taking a cue from the nation's largest retirement plan provider? Fidelity Investments has cut its assumed return on its defined benefit plan to 7 percent from 7.75 percent, reports the Boston Globe. Fidelity had stuck with the earlier assumption since 1999.

By cutting the discount rate it uses to calculate the plan liabilities, Fidelity effectively increased the present value of those benefits and caused itself to make a higher contribution to the plan this year. A Fidelity spokesperson told the paper that Fidelity intends to fully contribute to the plan.

The conservative path taken by Fidelity stands in stark contrast to many other defined benefit plan sponsors that have used higher discount rates to decrease their pension liabilities in recent years. IBM, for example, dropped its rate to 9.5 percent from 10 percent while Citigroup drops its to 8 percent from 9.5 percent, according to the Boston Globe. In contrast, Warren Buffet recently said that plan sponsors should be using a rate of just 6.5 percent.

Just how much of a difference the discount rate makes is highlighted by the case of Fidelity. The liabilities faced by the Boston Behemoth under the lower rate are 36 percent higher, or roughly $200 million more, than a year ago. Fidelity's plan currently has some $375 million of asset against $790 million of liabilities. Fidelity has made contributions to the plan of $53 million each of the past two years. Those contributions are the maximum it is allowed to make and Fidelity said it expects to again make the maximum contribution this year.

As a closely held family firm, Fidelity may have a freedom to ignore the short run impact of these decisions that other firms do not have. Those contributions are tax-deductible for the sponsor. In the case of Fidelity the payment will minimize its tax bill while not affecting the firm's stock price since there is no public market to be whipsawed by the burgeoning liability. Exchange-listed sponsors, on the other hand, have an incentive to keep the discount rate high to minimize the pension liability they report to shareholders. As in the case of Fidelity, changes in the liability often dwarf the potential tax-deduction value of any contributions.

And, by keeping the rate used in plan calculations at a realistic level, Fidelity is likely stepping around future financial traps that may catch other sponsors in the years ahead.  

Stay ahead of the news ... Sign up for our email alerts now
CLICK HERE

0.0
 Do You Recommend This Story?



GO TO: MFWire
Return to Top
 News Archives
2024: Q4Q3Q2Q1
2023: Q4Q3Q2Q1
2022: Q4Q3Q2Q1
2021: Q4Q3Q2Q1
2020: Q4Q3Q2Q1
2019: Q4Q3Q2Q1
2018: Q4Q3Q2Q1
2017: Q4Q3Q2Q1
2016: Q4Q3Q2Q1
2015: Q4Q3Q2Q1
2014: Q4Q3Q2Q1
2013: Q4Q3Q2Q1
2012: Q4Q3Q2Q1
2011: Q4Q3Q2Q1
2010: Q4Q3Q2Q1
2009: Q4Q3Q2Q1
2008: Q4Q3Q2Q1
2007: Q4Q3Q2Q1
2006: Q4Q3Q2Q1
2005: Q4Q3Q2Q1
2004: Q4Q3Q2Q1
2003: Q4Q3Q2Q1
2002: Q4Q3Q2Q1
 Subscribe via RSS:
Raw XML
Add to My Yahoo!
follow us in feedly




©All rights reserved to InvestmentWires, Inc. 1997-2024
14 Wall Street | 20th Floor | New York, NY 10005 | P: 212-331-8968 | F: 212-331-8998
Privacy Policy :: Terms of Use