Employee benefit plans are financial plans that employers establish to provide for their workers. Retirement plans are a type of employee benefit plan, in which employees make contributions that are automatically deducted from their paycheck. Employers can also contribute to their employees plan. Plans then invest this money into a variety of investment products, including alternative investments such as trusts, real estate funds, hedge funds and private equity funds. Valuing investments allows an employer or employee to determine the availability of funds for retirement distributions and other employee benefit payments.
The first step to evaluating an employee benefit plan's alternative investments is to recognize the goal of the process. Ultimately, an employee or employer who analyzes a plan wants to determine the fair market value of the plan's investments. While this is easy for basic investments such as stocks and bonds, it is more complex for alternative investments. This complexity comes from the fact that alternative investments are often illiquid, which means they can't be readily converted into cash.
The Financial Accounting Standards Board (FASB) offers standards for valuing a plan's alternative investments. To begin with, unaudited statements and informal reports do not provide solid information toward establishing a reasonable estimate of value. Collecting and reviewing audited financial statements from the investment providers offers information about growth over time. This allows an employer to calculate the value of an investment relative to its value at a defined point in time. Investment managers overseeing benefit plans can also provide firsthand information about a particular alternative investment's growth. Recent sale prices for similar alternative investments in other plans or on the open market provide a context for comparing values. An employer can also establish a benefit plan committee to review a plan's financial data and, after discussion and research, offer an objective good faith estimate of the value of all alternative investments.
The responsibility for valuing a plan's alternative investments falls to the employer offering the plan. Participating funds must produce their own financial statements, but do not need to deliver specific information about how their performance affects the plans that invest in them. Employers are responsible for delivering on the benefits they promise.
The federal government regulates the ways in which employers value and report on employee benefit plan investments. These regulations appear in the Employee Retirement Income Security Act of 1974 (ERISA). The law states that employers may not withhold information relating to a plan's investments and their values. It also requires employers to establish rules for each plan, which help ensure consistency over time and make it possible for employees to examine and learn about their benefits plans. The Department of Labor can impose financial penalties on employers who violate ERISA standards for valuing alternative investments.
- U.S. Department of Labor: Health Benefits, Retirement Standards, and Workers' Compensation: Employee Benefit Plans
- Perkins Accounting; Alternative Investments in Employee Benefit Plans; January 2009
- Employee Benefit Plan Audit Quality Center: Valuing and Reporting Plan Investments
- Haynes and Boone; Benefits News Alert; September 2008
- Creatas/Creatas/Getty Images