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Retirement and Benefit Plans
 12 Months Ended
Dec. 31, 2019
Retirement and Benefit Plans  
Retirement and Benefit Plans
23. RETIREMENT AND BENEFIT PLANS
The Bancorp’s qualified defined benefit plan’s benefits were frozen in 1998, except for grandfathered employees. The Bancorp’s other defined benefit retirement plans consist of
non-qualified
plans which are frozen and funded on an
as-needed
basis. A majority of these plans were obtained in acquisitions and are included with the
qualified defined benefit plan in the following tables (“the Plan”). The Bancorp recognizes the overfunded and underfunded status of the Plan as an asset and liability, respectively, in the Consolidated Balance Sheets.
 
 
The overfunded and underfunded amounts recognized in other assets and accrued taxes, interest and expense, respectively, on the Consolidated Balance Sheets were as follows as of December 31:
($ in millions)
 
2019
 
  
2018
 
Prepaid benefit cost
 
$
-
 
    
1
  
Accrued benefit liability
 
                           
(19
)
 
                          
(18
 )
Net underfunded status
 
$
(19
)
   
(17
 )
The following tables summarize the defined benefit retirement plans as of and for the years ended December 31:
Plans with an overfunded status
(a)
($ in millions)
 
2019
 
  
2018
 
Fair value of plan assets at January 1
 
$
                             
-
 
  
                        
185
  
Actual return on assets
 
 
-
 
    
(6
 )
Settlement
 
 
-
 
    
(9
 )
Benefits paid
 
 
-
 
    
(6
 )
Fair value of plan assets at December 31
 
$
-
 
    
164
  
Projected benefit obligation at January 1
 
$
-
 
    
188
  
Interest cost
 
 
-
 
    
6
  
Settlement
 
 
-
 
    
(9
 )
Actuarial gain
 
 
-
 
    
(16
 )
Benefits paid
 
 
-
 
    
(6
 )
Projected benefit obligation at December 31
 
$
-
 
    
163
  
Overfunded projected benefit obligation at December 31
 
$
-
 
    
1
  
Accumulated benefit obligation at December 31
(b)
  
$
-
 
    
163
  
(a)
The Bancorp’s qualified defined benefit plan had an underfunded status at
December 31, 2019
and is reflected in the underfunded status table. The Plan had an overfunded status at December 31, 2018.
(b)
Since the Plan’s benefits are frozen, the rate of compensation increase is no longer an assumption used to calculate the accumulated benefit obligation. Therefore, the accumulated benefit obligation was the same as the projected benefit obligation at December 31, 2018.
Plans with an underfunded status
($ in millions)
 
2019
 
  
2018
 
Fair value of plan assets at January 1
 
$
                             
164
 
  
                     
-
  
Actual return on assets
 
 
26
 
    
-
  
Contributions
 
 
2
 
    
3
  
Settlement
 
 
(9
)
   
-
  
Benefits paid
 
 
(8
)
   
(3
 )
Fair value of plan assets at December 31
 
$
175
 
    
-
  
Projected benefit obligation at January 1
 
$
181
 
    
21
  
Interest cost
 
 
7
 
    
1
  
Settlement
 
 
(9
)
   
-
  
Actuarial loss (gain)
 
 
23
 
    
(1
 )
Benefits paid
 
 
(8
)
   
(3
 )
Projected benefit obligation at December 31
 
$
194
 
    
18
  
Underfunded projected benefit obligation at December 31
 
$
(19
)
   
(18
 )
Accumulated benefit obligation at December 31
(a)
  
$
194
 
    
18
  
(a)
Since the Plan’s benefits are frozen, the rate of compensation increase is no longer an assumption used to calculate the accumulated benefit obligation. Therefore, the accumulated benefit obligation was the same as the projected benefit obligation at both
December 31, 2019
and 2018.
The estimated net actuarial loss for the Plan that will be amortized from AOCI into net periodic benefit cost during 2020 is $6 million. The estimated net prior service cost for the Plan that will be amortized from AOCI into net periodic benefit cost during 2020 is immaterial to the Consolidated Financial Statements.
The following table summarizes net periodic benefit cost and other changes in the Plan’s assets and benefit obligations recognized in OCI for the years ended December 31:
($ in millions)
 
2019
 
  
2018
   
2017
 
Components of net periodic benefit cost:
 
 
 
    
     
 
Interest cost
 
$
           
7
 
  
          
7
    
          
8
  
Expected return on assets
 
 
(8
)
   
(11
 )    
(10
 )
Amortization of net actuarial loss
 
 
6
 
    
6
      
7
  
Settlement
 
 
3
 
    
3
      
4
  
Net periodic benefit cost
 
$
8
 
    
5
      
9
  
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
 
Net actuarial loss (gain)
 
$
5
 
    
(1
 )    
(1
 )
Amortization of net actuarial loss
 
 
(6
)
   
(6
 )    
(7
 )
Settlement
 
 
(3
)
   
(3
 )    
(4
 )
Total recognized in other comprehensive income
 
 
(4
)
   
(10
 )    
(12
 )
Total recognized in net periodic benefit cost and other comprehensive income
 
$
4
 
    
(5
 )    
(3
 )
Fair Value Measurements of Plan Assets
The following tables summarize Plan assets measured at fair value on a recurring basis as of December 31:
 
Fair Value Measurements Using
(a)
  
2019 ($ in millions)
 
Level 1
(c)
    
Level 2
(c)
      
    
Level 3    
    
Total Fair Value  
  
Cash equivalents
 
$
                 
14
 
  
 
-
 
  
 
-
 
  
 
14
 
Mutual and exchange-traded funds
 
 
76
 
  
 
-
 
  
 
-
 
  
 
76
 
Debt securities:
 
 
 
  
 
 
  
 
 
  
 
 
U.S. Treasury and federal agencies securities
 
 
57
 
  
 
6
 
  
 
-
 
  
 
63
 
Mortgage-backed securities:
 
 
 
  
 
 
  
 
 
  
 
 
Non-agency
commercial mortgage-backed securities
  
 
-
 
  
 
1
 
  
 
-
 
  
 
1
 
Asset-backed securities and other debt securities
(b)
  
 
-
 
  
 
21
 
  
 
-
 
  
 
21
 
Total debt securities
 
$
57
 
  
 
28
 
  
 
-
 
  
 
85
 
Total Plan assets
 
$
147
 
  
 
28
 
  
 
-
 
  
 
175
 
(a)
For further information on fair value hierarchy levels, refer to Note 1.
(b)
Includes corporate bonds.
(c)
During the year ended December 31, 2019, no assets or liabilities were transferred between Level 1 and Level 2.
  
Fair Value Measurements Using
(a)
  
2018 ($ in millions)
 
Level 1
(d)
    
    
Level 2
(d)
            
    
Level 3          
    
Total Fair Value  
  
Cash equivalents
  $
25
      
-
      
-
      
25
  
Mutual and exchange-traded funds
   
46
      
-
      
-
      
46
  
Debt securities:
   
     
     
     
 
U.S. Treasury and federal agencies securities
   
43
      
3
      
-
      
46
  
Mortgage-backed securities:
   
     
     
     
 
Non-agency
commercial mortgage-backed securities
    
-
      
1
      
-
      
1
  
Asset-backed securities and other debt securities
(b)
    
-
      
18
      
-
      
18
  
Total debt securities
  $
43
      
22
      
-
      
65
  
Total Plan assets, excluding collective funds
  $
114
      
22
      
-
      
136
  
Collective funds (NAV)
(c)
   
     
     
     
28
  
Total Plan assets
   
     
     
    $
164
  
(a)
For further information on fair value hierarchy levels, refer to Note 1.
(b)
Includes corporate bonds.
(c)
Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of Plan assets presented elsewhere within this footnote.
(d)
During the year ended December 31, 2018, no assets or liabilities were transferred between Level 1 and Level 2.
The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Cash equivalents
Cash equivalents are comprised of money market mutual funds that invest in short-term money market instruments that are issued and payable in U.S. dollars. The Plan measures its cash equivalent funds that are exchange-traded using the fund’s quoted price, which is in an active market. Therefore, these investments are classified within Level 1 of the valuation hierarchy.
Mutual and exchange-traded funds
The Plan measures its mutual and exchange-traded funds, which are registered with the SEC, using the funds’ quoted prices which are available in an active market. Therefore, these investments are classified within Level 1 of the valuation hierarchy. The mutual and exchange-traded funds held by the Plan are open-ended funds and are required to publicly publish their NAV on a daily basis. The funds are also required to transact and use the daily NAV as a basis for transactions. Therefore, the NAV reflects the fair value of the Plan’s investment.
Debt securities
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or DCFs. Examples of such instruments, which are classified within Level 2 of the valuation hierarchy, include federal agency securities,
non-agency
commercial mortgage-backed securities and asset-backed securities and other debt securities.
Collective funds
Investments in collective funds are valued based upon the investee’s NAV or its equivalent as a practical expedient. NAV is determined by the fund’s management by dividing the fund’s net assets at fair
value by the number of units outstanding at the valuation date. Investments valued using NAV as a practical expedient are not classified within the fair value hierarchy.
Plan Assumptions
The Plan’s assumptions are evaluated annually and are updated as necessary. The discount rate assumption reflects the yield on a portfolio of high quality fixed-income instruments that have a similar duration to the Plan’s liabilities. The expected long-term rate of return assumption reflects the average return expected on the assets invested to provide for the Plan’s liabilities. In determining the expected long-term rate of return, the Bancorp evaluated actuarial and economic inputs, including long-term inflation rate assumptions and broad equity and bond indices long-term return projections, as well as actual long-term historical plan performance.
The following table summarizes the weighted-average plan assumptions for the years ended December 31:
   
  
2019    
 
  
           2018    
    
           2017         
  
   
For measuring benefit obligations at year end:
(a)
  
 
 
    
     
 
Discount rate
 
 
3.05
 %
   
4.10
      
3.47
  
For measuring net periodic benefit cost:
(a)
  
 
 
    
     
 
Discount rate
 
 
4.10
 
    
3.47
      
3.97
  
Expected return on plan assets
 
 
5.50
 
    
6.00
      
6.00
  
   
(a)
Since the Plan’s benefits were frozen, except for grandfathered employees, the rate of compensation increase is no longer applicable beginning in 2014 since minimal grandfathered employees are still accruing benefits.
Lowering both the expected rate of return on the plan assets and the discount rate by 0.25% would have increased the 2019 pension expense by approximately $1 million.
Based on the actuarial assumptions, the Bancorp expects to contribute $2 million to the Plan in 2020. Estimated pension benefit payments are $16 million for 2020, $17 million for each of the years 2021 through 2023 and $16 million for 2024. The total estimated payments for the years 2025 through 2029 is $70 million.
Investment Policies and Strategies
The Bancorp’s policy for the investment of Plan assets is to employ investment strategies that achieve a range of weighted-average target asset allocations relating to equity securities, fixed-income securities (including U.S. Treasury and federal agencies securities, mortgage-backed securities, asset-backed securities, corporate bonds and municipal bonds), alternative strategies (including traditional mutual funds, precious metals and commodities) and cash.
The following table provides the Bancorp’s targeted and actual weighted-average asset allocations by asset category for the years ended December 31:
   
    
Targeted Range
(b)
  
    
 
2019           
 
    
2018           
  
   
Equity securities
(a)
    
0-55
  % 
    
 
19
 
    
67
  
Fixed-income securities
   
50-100
      
    
 
59
 
    
23
  
Alternative strategies
   
0-5
      
    
 
-      
 
    
3
  
Cash or cash equivalents
   
0-100
      
    
 
22
 
    
7
  
   
Total
   
   
 
100  %
 
    
100
  
   
(a)
Includes mutual and exchange-traded funds.
(b)
These reflect the targeted ranges for the year ended December 31, 2019.
Plan Management’s objective is to maintain a fully-funded status of the qualified defined benefit plan while also minimizing the risk of excess assets. During 2018, Plan Management revised the investment policy to shift from a return-seeking strategy, with a high level of tolerance to volatility, to a
low-risk
strategy to maintain the funded plan status at or above 100%. As a result, the portfolio assets of the qualified defined benefit plan will continue to reduce exposure to equity securities and increase the weighting of long-duration fixed income, or liability-matching assets, as the funded status increases. There were no significant concentrations of risk associated with the investments of the Plan at December 31, 2019 and 2018.
Permitted asset classes of the Plan include cash and cash equivalents, fixed-income (domestic and
non-U.S.
bonds), equities (U.S.,
non-U.S.,
emerging markets and real estate investment trusts), equipment leasing and mortgages. The Plan utilizes derivative instruments including puts, calls, straddles or other option strategies, as approved by management.
Fifth Third Bank, National Association, as Trustee, is expected to manage Plan assets in a manner consistent with the Plan agreement and other regulatory, federal and state laws. As of December 31, 2019 and 2018, $175 million and $164 million, respectively, of Plan assets were managed by Fifth Third Bank, National Association. The Fifth Third Bank Pension, 401(k) and Medical Plan Committee (the “Committee”) is the plan administrator. The Trustee is required to provide to the Committee monthly and quarterly reports covering a list of Plan assets, portfolio performance, transactions and asset allocation. The Trustee is also required to keep the Committee apprised of any material changes in the Trustee’s outlook and recommended investment policy. There were no fees paid by the Plan for investment management, accounting or administrative services provided by the Trustee. Plan assets are not expected to be returned to the Bancorp during 2020.
Other Information on Retirement and Benefit Plans
The Bancorp has a qualified defined contribution savings plan that allows participants to make voluntary 401(k) contributions on a
pre-tax
or Roth basis, subject to statutory limitations. Expenses recognized for matching contributions to the Bancorp’s qualified defined contribution savings plan were $90 million, $83 million and $79 million for the years ended December 31, 2019, 2018 and 2017, respectively. The Bancorp recognized $4 million of profit sharing expense associated with the MB Financial, Inc. acquisition during the year ended December 31, 2019.
The Bancorp did not make profit sharing contributions during both the years ended December 31, 2018 and 2017. In addition, the Bancorp has a
non-qualified
defined contribution plan that allows certain employees to make voluntary contributions into a deferred compensation plan. Expenses recognized by the Bancorp for its
non-qualified
defined contribution plan were $6 million for the year ended December 31, 2019 and $4 million for both of the years ended December 31, 2018 and 2017.