Verizon sub likely to oversee MCI’s retirement plans

NEW YORK — Verizon Investment Management Corp. likely will assume oversight of the $1.6 billion of pension and retirement plan assets of MCI Inc. after its parent company acquires the smaller telecommunications firm.

Verizon Communications Inc., New York, announced its intention to acquire Ashburn, Va.-based MCI on Feb. 14 for $4.8 billion in equity and $488 million in cash. MCI also will pay its shareholders quarterly and special dividends totaling $1.5 billion, bringing the total value of the deal to $6.7 billion, according to statements from both companies. The deal is expected to close in about a year, pending regulatory approval.

William F. Heitmann, senior vice president-finance of Verizon Communications and president of Verizon Investment Management, Stamford, Conn., said it is logical to speculate that Verizon would take over management of the defined benefit assets of MCI, but no decision has been made.

"When the merger closes, we'll set up working committees and examine the best integration plan. MCI has relatively little in the way of pension assets compared to us, so it's fair to say that it probably will be integrated into ours. We'll take a look at all of the managers (of both plans) in terms of performance and how they fit into the asset allocation scheme. I don't know if there's going to be any shakeout; it's really too early to say right now," said Mr. Heitmann.

He said it has not yet been decided whether the two companies' 401(k) plans would be merged. "We would look at the overall benefit design and see where we should go once the merger happens."

Mr. Heitmann's firm oversees the investment management of the parent's $36 billion in defined benefit plan assets and $16 billion in 401(k) plan assets.

Verizon's defined benefit plans had a total surplus of $1.8 billion as of Dec. 31, 2003, according to its most recent annual report.

MCI brings to the merger a $1.2 billion 401(k) plan (as of June 30, 2003, according to the Money Market Directory), and two defined benefit plans — frozen to employees who joined the firm after Jan. 1, 1999 — totaling $396 million as of Dec. 31, 2003. The DB plans were underfunded by $57 million, according to MCI's latest annual report.

Calls seeking plan information made to Stephen R. Mooney, vice president and head of pension plan management at MCI, were not returned. Brittany Hoff, an MCI spokeswoman, said the company was not granting interviews regarding the merger.

Money management industry executives agree with Mr. Heitmann's prediction.

"Verizon has much bigger retirement plans and an entire office dedicated to managing those assets. I'd have to believe they'd take over," speculated one money manager familiar with Verizon, who asked not to be identified. The manager pointed out he has not spoken to officials at Verizon since the MCI acquisition was announced.

Judging from publicly available information, Verizon has a much more sophisticated investment approach than MCI.

According to data supplied to P&I, Verizon employs 293 external managers to run its defined benefit plan assets, compared with the 10 managers MCI uses for its plans.

Fidelity Investments, Boston, is bundled provider for Verizon's 401(k) plan; Merrill Lynch Investment Managers, Plainsboro, N.J., is bundled provider for MCI's.

Neither uses an investment consultant.

In addition to absorbing MCI's pension assets, Verizon might have to deal with lingering lawsuits stemming from the downfall of WorldCom Inc., Clinton, Miss.

WorldCom purchased MCI in 1998. Accounting irregularities were discovered at the company in April 2002, and on June 25 that year, Nasdaq halted trading in WorldCom's two tracking stocks. WorldCom filed for bankruptcy protection on July 21, 2002, and now is defunct. The MCI name was assumed for all business dealings on April 14, 2003, and MCI's reorganization plan was approved last Oct. 31, according to a timeline on the firm's website.

About 40% of the assets of WorldCom's 401(k) plan were invested in company stock in June 2002 (P&I, July 8, 2002). The collective loss was at least $775 million after WorldCom stock plunged to 6 cents per share that summer from a high of $64.50 in 1999. Among the class-action suits that have yet to be settled, ex-WorldCom employees said they will appeal a judge's Feb. 1 dismissal of their suit seeking damages from WorldCom's 401(k) plan administrator, Merrill Lynch Trust Co., for breach of fiduciary duty (P&I Online, Feb. 3).

Officials at Verizon would not comment on the suits.