Compliance November 8, 2016

FASB Considering Change to Pension Cost Reporting

The board says stakeholders have stated that the current presentation requirement has less value and requires users to incur greater costs in analyzing financial statements.
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The Financial Accounting Standards Board has issued an exposure draft on Compensation—Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

The amendments in the proposed update would require a defined benefit (DB) plan sponsor to report the service cost component of retirement and postretirement benefit costs in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost would be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.

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If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described.

The amendments in the proposed update also would allow only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset).

The FASB explained that under generally accepted accounting principles (GAAP), defined benefit pension cost and postretirement benefit cost (net benefit cost) comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees. Those components are aggregated for reporting in the financial statements. Topic 715, Compensation—Retirement Benefits, does not prescribe where the amount of net benefit cost should be presented in an employer’s income statement and does not require entities to disclose by line item the amount of net benefit cost that is presented in the income statement or capitalized in assets.

According to the FASB, many stakeholders have observed that the presentation of defined benefit cost on a net basis combines elements that are distinctly different in their predictive value. As such, these stakeholders have stated that the current presentation requirement has less value and requires users to incur greater costs in analyzing financial statements. The reduced transparency in the presentation of net benefit cost also reduces the usefulness of financial information.

The full exposure draft and instructions for making comments is here.
Client Service November 8, 2016

Plan Document Best Practices Framework

A new analysis contends that, with careful governance practices in place, managing a compliant and effective retirement plan doesn’t have to be burdensome or even difficult.
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Running a fully compliant retirement plan under the Employee Retirement Income Security Act (ERISA) is undoubtedly a critical responsibility, a new Arnerich Massena white paper argues, but that doesn’t mean it has to be overly difficult.

To help plan sponsors and other fiduciaries meet their prescribed duties under ERISA in an efficient way, the investment services and consulting firm has published “Retirement Plan Best Practices: Plan Governance.” The white paper spells out the main areas of retirement plan governance and compliance, offering clear pathways for plans to consider following in order to improve compliance processes.

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For example, the paper argues that all ERISA-covered plans must have a handful of specific procedures and documentation in place. “Best practice is to have at least these three governing documents: Summary Plan Description (SPD), a Committee Charter and an Investment Policy Statement (IPS).” According to Arnerich Massena researchers, these three plan documents together will “outline the key features, philosophy, processes, and procedures of the plan.”

“The plan documents should be maintained and reviewed at regular intervals, typically annually except in cases where changing circumstances necessitate a review and update sooner,” the white paper recommends.

In terms of what each document should include, the paper suggests the SPD should “outline the key features of the plan.” The document fulfills legal requirements and provides participants with an understanding of basic plan provisions. As such, a plan’s SPD must outline the rules by which the plan is governed, and covers such topics as employer contribution and vesting information, eligibility, plan loans and withdrawals, distributions, and contact information for questions. Importantly, the paper recommends the SPD “should be written in language participants can easily understand.”

When it comes to the Investment Committee Charter, this document “doesn’t need to be elaborate, but it should outline some fundamentals, providing committee members with the scope and range of authority to empower them to manage the plan and fulfill their fiduciary responsibilities.”

Further, according to Arnerich Massena, the charter should “specify activities for which the committee is responsible, such as coordinating vendor analysis and recommending plan design features; define the governing bodies with whom the committee must consult and to whom they need to provide recommendations; define how committee members are selected or appointed; establish how often regular committee meetings should occur; and define the roles of any outside consultants.”

NEXT: Sizing and managing the committee 

Finally, the IPS should be viewed as “the foundation for how the plan’s investment program is expected to operate.” In this light, the IPS “should provide guidelines for selecting, monitoring, measuring, and making decisions for the plan’s investments.” The IPS will also “define the plan and its purpose … and describe responsibilities for those involved with the investment program.”

When it comes to creating and managing the committee that will be charged with implementing the plan documents, the analysis suggests an optimal committee structure will depend on an organization’s needs, but there are a few common considerations to keep in mind when deciding who should be on the committee.

“The number of committee members is important,” the research warns. “Very large committees begin to lose their effectiveness and ability to make decisions efficiently; large groups can end up paralyzed and unable to reach consensus. A smaller group that has enough diversity to engender meaningful discussion and healthy debate is optimal. There is no perfect number, but we find that five to seven members seems to meet objectives, while more than 10 is typically too unwieldy … Having an odd number of committee members can prevent votes being tied up.”

Arnerich Massena says the investment committee should include a representative of senior management as well as anyone who serves as a fiduciary to the plan.

“The organization’s legal counsel should either be on the committee, or simply attend committee meetings in an advisory capacity,” the analysis states. “Although they are not usually voting members, committee meetings should be attended by representatives from the plan’s providers, such as the trustee, investment consultant, and recordkeeper.”

The research concludes that ongoing education for the committee is tantamount to success. This will include education to understand the nature of the fiduciary duty, education about functioning as an effective committee, as well as investment education.

The full analysis is available for download here. 

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