Employee Benefit Plans

12 Months Ended

Dec. 31, 2019

Retirement Benefits [Abstract]

Employee Benefit Plans

Employee Benefit Plans

The Company sponsors the Discover Financial Services Pension Plan (the “Discover Pension Plan”), which is a non-contributory defined benefit plan that is qualified under Section 401(a) of the Internal Revenue Code, for eligible employees in the U.S. Effective December 31, 2008, the Discover Pension Plan was amended to discontinue the accrual of future benefits. The Company also sponsors the Discover Financial Services 401(k) Plan (the “Discover 401(k) Plan”), which is a defined contribution plan that is qualified under Section 401(a) of the Internal Revenue Code, for its eligible U.S. employees.

Discover Pension Plan

The Discover Pension Plan generally provides retirement benefits that are based on each participant’s years of credited service prior to 2009 and on compensation specified in the Discover Pension Plan. The Company’s policy is to fund at least the amounts sufficient to meet minimum funding requirements under the Employee Retirement Income Security Act of 1974, as amended.

Net Periodic Benefit Cost

Net periodic benefit cost expensed by the Company included the following components (dollars in millions):
	For the Years Ended December 31,
	2019			2018			2017
Interest cost on projected benefit obligation	$	23		$	22		$	23
Expected return on plan assets	(29		)	(26		)	(25		)
Net amortization	4			5			4
Net periodic benefit (income) cost	$	(2	)	$	1		$	2

Accumulated Other Comprehensive Income

Pretax amounts recognized in AOCI that have not yet been recognized as components of net periodic benefit cost consist of (dollars in millions):
	December 31, 2019
Prior service credit	$	1
Net loss	(294		)
Total	$	(293	)

Benefit Obligations and Funded Status

The following table provides a reconciliation of the changes in the benefit obligation and fair value of plan assets as well as a summary of the Discover Pension Plan’s funded status (dollars in millions):
	For the Years Ended December 31,
	2019			2018
Reconciliation of benefit obligation
Benefit obligation at beginning of year	$	550		$	603
Interest cost	23			22
Actuarial losses (gains)	98			(57		)
Benefits paid	(21		)	(18		)
Benefit obligation at end of year	650			550
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year	455			424
Actual return on plan assets	91			(36		)
Employer contributions	—			85
Benefits paid	(21		)	(18		)
Fair value of plan assets at end of year	525			455
Unfunded status (recorded in accrued expenses and other liabilities)	$	(125	)	$	(95	)

Actuarial losses and gains on the benefit obligation were primarily driven by changes in the discount rate for the years ended December 31, 2019 and 2018.

Assumptions

The following table presents the assumptions used to determine the benefit obligation:
	December 31,
	2019		2018
Discount rate	3.30	%	4.27	%

The following table presents the assumptions used to determine net periodic benefit cost:
	For the Years Ended December 31,
	2019		2018		2017
Discount rate	4.27	%	3.68	%	4.29	%
Expected long-term rate of return on plan assets	6.15	%	6.15	%	6.50	%

The expected long-term rate of return on plan assets was estimated by computing a weighted-average return of the underlying long-term expected returns on the different asset classes, based on the target asset allocations. Asset class return assumptions are created by integrating information on past capital market performance, current levels of key economic indicators and the market insights of investment professionals. Individual asset classes are analyzed as part of a larger system, acknowledging both the interaction between asset classes and the influence of larger macroeconomic variables such as inflation and economic growth on the entire structure of capital markets. Medium and long-term economic outlooks for the U.S. and other major industrial economies are forecast in order to understand the range of possible economic scenarios and evaluate their likelihood. Historical relationships between key economic variables and asset class performance patterns are analyzed using empirical models. Finally, comprehensive asset class performance projections are created by blending descriptive asset class characteristics with capital market insight and

the initial economic analyses. The expected long-term return on plan assets is a long-term assumption that generally is expected to remain the same from one year to the next but is adjusted if there is a material change in the target asset allocation and/or significant changes in fees and expenses paid by the Discover Pension Plan.

Discover Pension Plan Assets

The targeted asset allocation for 2020 by asset class is 72% and 28% for fixed income securities and equity securities, respectively. The Discover Financial Services Retirement Plan Investment Committee (the “Investment Committee”) determined the asset allocation targets for the Discover Pension Plan based on its assessment of business and financial conditions, demographic and actuarial data, funding characteristics and related risk factors. Other relevant factors, including industry practices and long-term historical and prospective capital market returns were considered as well.

The Discover Pension Plan return objectives provide long-term measures for monitoring the investment performance against growth in the pension obligations. The overall allocation is expected to help protect the Discover Pension Plan’s funded status while generating sufficiently stable real returns (net of inflation) to help cover current and future benefit payments and to improve the Discover Pension Plan’s funded status. Total Discover Pension Plan portfolio performance is assessed by comparing actual returns with relevant benchmarks, such as the S&P 500 Index, the S&P 500 Total Return Index, the Russell 2000 Index and the MSCI All Country World Index.

Both the fixed income and equity portions of the asset allocation use a combination of active and passive investment strategies and different investment styles. The fixed income asset allocation consists of longer duration fixed income securities in order to help reduce plan exposure to interest rate variation and to better correlate assets with obligations. The longer duration fixed income allocation is expected to help stabilize the funding status ratio over the long term.

The asset mix of the Discover Pension Plan is reviewed by the Investment Committee on a regular basis. The asset allocation strategy will change over time in response to changes in the Discover Pension Plan’s funded status.

Fair Value Measurements

The Discover Pension Plan’s assets are stated at fair value. Quoted market prices in active markets are the best evidence of fair value and are used as the basis for the measurement, if available. If a quoted market price is not available, the estimate of the fair value is based on the best information available in the circumstances. The table below presents information about the Discover Pension Plan assets and indicates the level within the fair value hierarchy, as defined by ASC Topic 820, with which each item is associated as of the end of the current period. For a description of the fair value hierarchy, see Note 20: Fair Value Measurements. (dollars in millions):
	Level 1		Level 2		Level 3		Net Asset Value		Total		Net Asset Allocation
Balance at December 31, 2019
Assets
Cash	$	7	$	—	$	—	$	—	$	7	1	%
Domestic small/mid cap equity fund	—		6		—		—		6		1	%
Emerging markets equity fund	—		—		—		16		16		3	%
Global equity fund	—		73		3		45		121		23	%
Domestic large cap equity fund	—		8		—		—		8		2	%
Long duration credit fund	—		205		—		—		205		39	%
Non-core fixed income fund	—		—		64		—		64		12	%
U.S. Treasury securities	87		—		—		—		87		17	%
Temporary investment fund	—		15		—		—		15		3	%
Total assets	94		307		67		61		529
Liabilities
Futures contracts	—		4		—		—		4		1	%
Total liabilities	—		4		—		—		4
Net assets	$	94	$	303	$	67	$	61	$	525	100	%
Balance at December 31, 2018
Assets
Domestic small/mid cap equity fund	$	—	$	6	$	—	$	—	$	6	1	%
Emerging markets equity fund	—		—		—		17		17		4	%
Global equity fund	—		82		—		42		124		27	%
Domestic large cap equity fund	—		7		—		—		7		2	%
Long duration credit fund	—		125		—		—		125		28	%
Futures contracts	—		6		—		—		6		1	%
Non-core fixed income fund	—		—		65		—		65		14	%
U.S. Treasury securities	59		—		—		—		59		13	%
Stable value fund	—		1		—		—		1		—	%
Temporary investment fund	—		45		—		—		45		10	%
Total assets	$	59	$	272	$	65	$	59	$	455	100	%

Cash Flows

The Company does not expect to make any contributions to the Discover Pension Plan in 2020.

Expected benefit payments associated with the Discover Pension Plan for each of the next five years and in aggregate for the years thereafter are as follows (dollars in millions):
	December 31, 2019
2020	$	16
2021	$	18
2022	$	19
2023	$	20
2024	$	22
Following five years thereafter	$	132

Discover 401(k) Plan

Under the Discover 401(k) Plan, eligible U.S. employees receive 401(k) matching contributions. Eligible employees also receive fixed employer contributions. The pretax expense associated with the Company contributions for the years ended December 31, 2019, 2018 and 2017 was $87 million, $69 million and $64 million, respectively.