Posted by Maria T. Hurd, CPA
General Rule
Pursuant to the Form 5500 instructions, plan sponsors must enter the current value of assets as of the beginning and the end of the plan year on the Schedule H: Statement of Net Assets Available for Benefits. The instructions also state that current value means fair market value where available. Otherwise, it means the fair value as determined in good faith under the terms of the plan by a trustee or a named fiduciary, assuming an orderly liquidation at time of the determination. See ERISA Section 3(26).
As an example, a popular volume submitter plan document requires an adjustment to fair market value as of each valuation date, and specifically indicates that the “…trustee shall appraise all moneys, securities, and other property in the Trust Fund, including Segregated Funds and Controlled Accounts, but excluding life insurance policies, and the then-fair market value for each asset.“
Large Plans: Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 820
For large plans that require an audit, FASB ASC 820 requires that investments be presented at fair value and requires extensive financial statement disclosures about the inputs used for each valuation technique. If the plan, inclusive of the brokerage window, holds investments in assets without readily determinable fair values, the values provided by the service organization may or may not be an appropriate measure of fair value. Even if the hard-to-value asset was purchased by a participant through a self-directed account, plan management is still responsible for determining the fair value measurements and disclosures included in the financial statements.
Although plan auditors can help plan sponsors better understand the requirements of FASB ASC 820 and help determine the information needed to estimate fair value and prepare the required disclosures, independence rules of the AICPA and the DOL restrict the non-audit services auditors can perform for a plan for which they perform the annual financial statement audit. Therefore, plan auditors cannot perform the investment valuations or take on management’s role and responsibility for the related note disclosures.
Form 5500 vs. Large Plan Financial Statements
As a response to information requests for extensive asset detail, many service providers quote the Form 5500 instructions as the reason they have reported participant-directed brokerage accounts as one asset held for investment, breaking out only partnership or joint venture interests, real property, employer securities, loans, and investments that can result in a loss in excess of the account balance of the participant who directed the transaction.
Unfortunately, the DOL rules that allow reporting relief for brokerage accounts for Form 5500, do not extend to the disclosure requirements for financial statements presented in accordance with Generally Accepted Accounting Principles. In fact, ERISA Section 103(a)(3) provides that: “the administrator of an employee benefit plan shall engage, on behalf of all plan participants, an independent qualified public accountant who shall conduct such an examination of any financial statements of the plan and of other books and records of the plan as the accountant may deem necessary to enable the accountant to form an opinion as to whether the financial statements and schedules required to be included in the annual report are presented fairly in conformity with Generally Accepted Accounting Principles applied on a basis consistent with that of the preceding year. Such examination shall be conducted in accordance with Generally Accepted Auditing Standards, and shall involve such tests of the books and records of the plan as are considered necessary by the independent qualified public accountant.” Therefore, it is imperative that sponsors of large plans ensure that their service providers will be able to comply with the reporting requirements applicable to large plan filings.
Plan Sponsors Must Understand the Implications of the Plan’s Offerings
Counter-intuitive as it may seem to some plan sponsors, allowing participants to invest in hard-to-value investments through brokerage windows or self-directed accounts does not eliminate their obligation to establish accounting and financial reporting processes for determining their fair value and, for large plans, obtaining enough detail to present the disclosures required by FASB ASC 820. In some cases, third party valuation services may be necessary to assist with documentation of the valuation techniques, assumptions and related inputs, and additional record keepers are required to summarize investment information in brokerage windows in enough detail to comply with the disclosure requirements of FASB ASC 820.
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