US Bank 2008 Annual Report Download - page 95

at the employees’ direction, among a variety of investment
alternatives. Employee contributions are 100 percent
matched by the Company, up to four percent of an
employee’s eligible annual compensation. The Company’s
matching contribution vests immediately. Although the
matching contribution is initially invested in the Company’s
common stock, an employee can reinvest the matching
contributions among various investment alternatives. Total
expense was $76 million, $62 million and $58 million in
2008, 2007 and 2006, respectively.
Pension Plans Pension benefits are provided to substantially
all employees based on years of service, multiplied by a
percentage of their final average pay. Employees become
vested upon completing five years of vesting service. In
addition, two cash balance pension benefit plans exist and
only investment or interest credits continue to be credited to
participants’ accounts. Plan assets consist of various equities,
equity mutual funds and other miscellaneous assets.
In general, the Company’s pension plans’ objectives
include maintaining a funded status sufficient to meet
participant benefit obligations over time while reducing
long-term funding requirements and pension costs. The
Company has an established process for evaluating all the
plans, their performance and significant plan assumptions,
including the assumed discount rate and the long-term rate
of return (“LTROR”). Annually, the Company’s
Compensation Committee (“the Committee”), assisted by
outside consultants, evaluates plan objectives, funding
policies and plan investment policies considering its long-
term investment time horizon and asset allocation strategies.
The process also evaluates significant plan assumptions.
Although plan assumptions are established annually, the
Company may update its analysis on an interim basis in
order to be responsive to significant events that occur during
the year, such as plan mergers and amendments.
In addition to the funded qualified pension plans, the
Company maintains non-qualified plans that are unfunded.
The assumptions used in computing the present value of the
accumulated benefit obligation, the projected benefit
obligation and net pension expense are substantially
consistent with those assumptions used for the funded
qualified plans.
Funding Practices The Company’s funding policy is to
contribute amounts to its plans sufficient to meet the
minimum funding requirements of the Employee Retirement
Income Security Act of 1974, plus such additional amounts
as the Company determines to be appropriate. The
Company made no contributions to the qualified pension
plans in 2008 or 2007, and anticipates no contributions in
2009. Any contributions made to the plans are invested in
accordance with established investment policies and asset
allocation strategies.
Investment Policies and Asset Allocation In establishing its
investment policies and asset allocation strategies, the
Company considers expected returns and the volatility
associated with different strategies. The independent
consultant performs modeling that projects numerous
outcomes using a broad range of possible scenarios,
including a mix of possible rates of inflation and economic
growth. Starting with current economic information, the
model bases its projections on past relationships between
inflation, fixed income rates and equity returns when these
types of economic conditions have existed over the previous
30 years, both in the U.S. and in foreign countries.
Generally, based on historical performance of the
various investment asset classes, investments in equities have
outperformed other investment classes but are subject to
higher volatility. While an asset allocation including debt
securities and other assets generally has lower volatility and
may provide protection in a declining interest rate
environment, it limits the pension plan’s long-term up-side
potential. Given the pension plans’ investment horizon and
the financial viability of the Company to meet its funding
objectives, the Committee has determined that an asset
allocation strategy investing principally in equities diversified
among various domestic equity categories and international
equities is appropriate. Domestic and international equities
declined significantly in 2008, resulting in an under-funded
position for the qualified pension plans of $391 million. At
December 31, 2008 and 2007, plan assets of the qualified
pension plans included mutual funds that have asset
management arrangements with related parties totaling
$791 million and $1.3 billion, respectively.
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