Rabbi Trust and FAS87 Expense

[Guest tbsb7]

An employer sets up a rabbi trust for purposes of a SERP they have in place.

Can this employer, when calculating their NPPC for Fas87 take an expected return on assets for this rabbi trust they have set up?

Thanks!

[BeckyMiller]

Hey - non-qualified plans that use a Rabbi trust to "fund" the benefits are generally reported gross on the plan sponsor's financial statements. The assets are reported on the asset side as investments. The obligation for the deferred compensation is reported as a liability on the liability side. Thus, you wouldn't reduce the liability for the expected return on the rabbi trust assets.

[Guest wmacdonaldrcg]

I think what you are asking is the interest rate assumption for FAS87? If you are informally funding the SERP with a rabbi trust, you can use the assumed interest rate on earnings in calculating your liabilitity (i.e. 7%). The other response is right, the asset and liability is seperate.

William L. MacDonald

President & CEO

Retirement Capital Group

www.retirementcapital.com

[MGB]

Under ANY SFAS 87 calculation, the assumption of investment income has no bearing on the calculation of liability. The liability must be measured using the interest rate inherent in settling the liability with a third party (e.g., an insurance company), or, as a proxy to that, the most common approach is to use high-quality bond yields. Nowhere in this determination do the investments come into play.

[Guest tbsb7]

Actually, I just wanted to confirm that a rabbi trust cannot "formally" fund a SERP, thus when calculating the FAS87 expense the expected return on assets should be 0, even though investment income is generated from the assets held in the Rabbi trust.

[Guest wmacdonaldrcg]

I disagree with your comment of using zero return in calulating FAS-87 liabilities, when in fact you are informally funding a SERP liability in a Rabbi Trust. We use a 7% earnings assumption in most of our calulations.

[MGB]

You are confusing issues here. There is no return assumption EVER in calculating liabilities. There is a discount rate. It has no relationship to any investment. It is set by standards in SFAS 87 that are the same no matter if there are investments or not.

The rate of return assumption on investments is used in determining costs. You cannot use this element of cost in the case of a Rabbi trust. The costs are determined as if there were no investments. The investments themselves are carried on the asset side of the balance sheet and actual return enters into the income statement...not the assumed rate of return that would apply if it were included in the pension costs.

I suggest a review of the definition of plan assets in SFAS 87. Because of the ability of creditors to access the assets in a Rabbi trust, they are not plan assets.

[Guest tbsb7]

MGB--

Thanks, I agree with your response. My interpretation of the definition of plan assets as outlined in FAS87 was that the assets held in a trust must be "restricted". Since a rabbi trust is still open to creditors in the case of insolvency, it can not be considered under the plan assets. Therefore, when calculating the net periodic pension cost for that year, the expected return on assets should be 0.

And you are exactly right, I am not discussing the funding rate used to calculate the liabilities associated with the plan or the discount rate used in determining the costs of the plan.

Thank you!