Fido Thinks Long-Term
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Thursday, March 06, 2003

Fido Thinks Long-Term

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.

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