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Just as defined benefit retirement plans are beginning to recover from the equities market downturn of a couple of years ago, new accounting rules are challenging employers to disclose more about how and why they invest the way they do. And as employees seek to hold their employers accountable for past pension plan losses during the market slide, the rules could also provide more information to fuel fiduciary lawsuits--one more blow to already beleaguered defined benefit plans.

Financial Accounting Standards Board (FASB) riding 132, announced Dee. 23, 2003, calls for employer sponsors of defined benefit pension plans to provide dramatically more detailed information about plan assets and investment policy.

The ruling also applies to any other post-retirement benefits that may be funded by the defined benefit plan assets, including retiree medical benefits or retiree life insurance. The rule requires employers to provide financial statements that include a detailed breakdown of plan assets by category, a description of investment policies and strategies, and target allocations of assets as percentages of total investments.

Previously, plan sponsors were only required to disclose to participants the total plan assets and benefits paid out on an annual basis.

During the equities market downturn, employers scrambled to get out of collapsing stock market investments, but found few alternatives among fixed income investments that could meet their income needs. As a result, a third or more of defined benefit plans become underfunded, according to pension consultant estimates.

Announcing the ruling late last year, FASB project manager Peter Proestakes noted that the ruling was an attempt to respond to concerns raised by investors and other users of financial statements about the need for greater disclosure of financial information.

The standard was effective immediately for domestic plans, and most employers are already complying with the ruling for their first quarterly statements, says Alan Jacobs, senior actuary at Eisner Retirement Solutions LLC in New York, a subsidiary of accounting firm Eisner LLP.

However, by complying with the standard, employers are also forcing themselves to take a closer look at the way they invest plan assets and the relationship between assets, benefits payable and the cash flow needed to fund those benefits, he says.

Jacobs also points to the new investment policy requirements. "By requiring employers to state an investment policy, the riding will offer plan participants insight into how employers plan to meet their goals with a specific strategy and mix of investments," he says.

Jacobs says he fears the riding will pose yet another problem for defined benefit plans, which have been in decline for the past 20 years and discourage formation of new plans by employers.

Murray S. Akresh, partner at PricewaterhouseCoopers HR Solutions LLP in New York agrees that the ruling will dramatically change the way employers report on retirement plan activity. However, he says most domestic plans should have no difficulty complying, nor should they have trouble with additional fiduciary liability.

He also notes that employers that sponsor plans for overseas workers may have difficulty getting information from foreign accounting firms and actuaries. Foreign plans have until next year to apply.

LEN STRAZEWSKI writes regularly for Risk & Insurance. He can be reached at
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Title Annotation:Benefits
Author:Strazewski, Len
Publication:Risk & Insurance
Date:May 1, 2004
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