Fannie Mae 2004 Annual Report Download - page 330

In determining our net periodic benefit costs, we assess the discount rate to be used in the annual actuarial
valuation of our pension and postretirement benefit obligations at year-end. We consider the current yields on
high-quality, corporate fixed-income debt instruments with maturities corresponding to the expected duration
of our benefit obligations and supported by cash flow matching analysis based on expected cash flows specific
to the characteristics of our plan participants, such as age and gender. As of December 31, 2004, we reduced
the discount rate used to determine our accumulated projected benefit obligation by 50 basis points to 5.75%
to reflect a corresponding rate reduction in corporate-fixed income debt instruments. We also assess the long-
term rate of return on plan assets for our qualified pension plan. The return on asset assumption reflects our
expectations for plan-level returns over a term of approximately seven to ten years. Given the longer-term
nature of the assumption and a stable investment policy, it may or may not change from year to year. However,
if longer-term market cycles or other economic developments impact the global investment environment, or
asset allocation changes are made, we may adjust our assumption accordingly. The expected long-term rate of
return on plan assets for 2004 remained unchanged from the 2003 rate of 7.5% because of the stability of the
investment market and our asset allocations. We used an estimated long-term rate of return of 8.5% in 2002.
Changes in assumptions used in determining pension and postretirement benefit plan expense did not have a
material effect in the consolidated statements of income for the years ended December 31, 2004, 2003 or
2002.
The fair value allocation of our qualified pension plan assets on a weighted-average basis as of December 31,
2004 and 2003, and the target allocation, by asset category, are displayed below.
Investment Type
Target
Allocation 2004 2003
As of
December31,
Asset
Allocation
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75-85% 84% 86%
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-20% 15 14
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-2% 1 —
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100%
Given the diversity of our average employee age, gender and other characteristics, our investment strategy is
to diversify our plan assets across a number of investments to reduce our concentration risk and maintain an
asset allocation that allows us to meet current and future benefit obligations. With the goal of diversification,
the assets of the qualified pension plan consist primarily of exchange-listed stocks, the majority of which are
held in a passively managed index fund. We also invest in actively managed equity portfolios, which are
restricted from investing in shares of our common or preferred stock, and an enhanced-index intermediate
duration fixed income account. In addition, the plan holds liquid short-term investments that provide for
monthly pension payments, plan expenses and, from time to time, may represent uninvested contributions or
reallocation of plan assets. Our asset allocation policy provides for a larger equity weighting than many
companies because our active employee base is relatively young, and we have a relatively small number of
retirees currently receiving benefits, both of which suggest a longer investment horizon and consequently a
higher risk tolerance level. Management periodically assesses our asset allocation to assure it is consistent with
our plan objectives.
The table below displays the benefits we expect to pay in each of the next five years and subsequent five years
for our pension plans and postretirement plan. The expected benefits are based on the same assumptions used
to measure our benefit obligation as of December 31, 2004. In December 2003, the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act introduces a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree
health care plans that provides a benefit that is at least actuarially equivalent to Medicare Part D. We are
entitled to a subsidy under the Act, which reduces the accumulated postretirement benefit obligation attributed
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)