The Financial Accounting Standards Board last week issued an exposure draft of a proposed accounting standards update that would change how certain market-based cash balance plans measure benefit obligations for employer accounting purposes.
The June 10 draft proposes amending the Accounting Standards Codification to require that firms value the cost of benefits offered as market-based cash balance plans—which are legally classified as defined benefit plans—by setting the discount rate equal to the assumed interest crediting rate. The plans impacted by the change are those which allow participants to elect a lump-sum payout option and in which participant benefits are communicated as an account balance, comprised of pay credits and interest rates based on one of the following investable market returns:
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- The return on the plans’ assets;
- The return on the plans’ assets that approximates the associated cash balance liabilities; and
- The return on a regulated investment company.
If approved, plan sponsors would be able to apply the new accounting guidance prospectively, beginning with their next pension measurement date.
Rationale
Accountants have varied in their approaches to measuring benefit obligations, particularly in determining the appropriate discount rate, according to a recent analysis from Milliman. As a result, some reported benefit obligations have differed from the sum of participant balances—and at times exceeded those balances.
“This change removes [those] esoteric, illogical results,” says William Strange, a principal in and consulting actuary at Milliman. “To apply that to plan sponsors: If you were hesitant about having this type of plan because of the possibility that you could have a liability higher than your account balance, or any kind of balancing volatility, this [proposed rule] removes that for you.”
Idan Shlesinger, a retirement solutions practice leader at October Three Consulting, says the existing accounting rules for market-based cash balance plans “artificially [create] financial risk.” He says the FASB’s proposal is a small technical fix, but one with a huge impact.
“As far as we can tell, there have been zero objections” to the changes, Shlesinger says. “It means we’re heading toward this being a formal, final fix in short order.”
Shlesinger says that if any concerns were raised during the comment period, they would likely pertain to the draft’s narrow applicability to market-based cash balance plans. He says pension accounting can create challenges for other plan designs too—but that market-based cash balance plans have unique characteristics worth addressing in a narrow, targeted approach.
Market-based cash balance plans, which derive interest credits from the actual return on plan assets—as opposed to a traditional cash balance plan’s fixed rate of return or rate of return tied to a bond index—have gained popularity over the past decade. Almost 60% of all DB plans in the U.S. are now cash balance plans, according to October Three Consulting’s “Pension Trends 2025: Cash Balance Plans Take Over—and Market Interest Credits Surge.” In 2018, only about 10% of cash balance plans used a market-based crediting rate, but that figure now sits around 60%.
“In a nutshell, it’s the growing popularity of these plans that’s put a focus on how they should be recorded on company books,” says Milliman’s Strange. “FASB’s provided much-needed guidance so that everyone’s doing [their calculations] the same way.”
The draft was revealed after the FASB approved in January a recommendation of its Emerging Issues Task Force to proceed with making the valuation changes. The FASB instructed its staff that month to create the proposed accounting standards update for the board to consider in a vote on a written ballot.
Stakeholder comments on the draft are due before a 60-day comment period concludes on August 10.
