valuation of bonds

[Guest deathbycashcall]

May a trustee "choose" to value bonds or CD's at par or cost?

A dispute is brewing between the TPA and the financial advisor that appears at this point to be boiling down to the fair market value of bonds. TPA reconciles the trust and determines that the plan experienced a loss of 3%. Bonds were valued at fair market value by the brokerage house. Obviously, bonds lost value as interest rates have begun to rise.....plus a couple of GM bonds were downgraded adding fuel to the fire. Financial advisor explains to client that he hasn't lost money at all.....hold the bonds til maturity and everything will be just fine.....no losses to the plan. TPA says that ERISA requires the valuation of all assets at "fair market value".....very clear for purposes of 5500 reporting.

Assuming TPA is correct and all plan assets must be reported at fair market value for 5500 reporting purposes, could the trustee decide to value the bonds at cost or par value for purposes of the valuation without jeopardizing qualified status of the plan? Trustee does not want to show a loss to plan participants if the loss is strictly unrealized and he has every intention of keeping the bonds until maturity.

Of course, a Form 5500 that doesn't tie to the valuation doesn't sit right with me, just wondering if anyone else has run into a similar situation.

CD's present the same problem. Had a case recently where the trustees bought CD's at various banks for 15 years. They were always valued at par until they decided to start buying them through a brokerage house. Banks always reported the value of the CD at par.....the brokerage house reported the value at fair market value. So simply because the CD's were held somewhere else, participants began to see losses in their accounts even though the portfolio was invested entirely in insured CD's.

Just wondering if anyone else has come across these issues and if so how they were dealt with.

[mming]

I've had similar experiences with CDs held by a couple of the largest, most well-known brokerage firms. Their statements show unrealized gains or losses depending on whether the prevailing CD rate is higher or lower than the rate of the CDs held! Since we feel such gains/losses are not appropriate for CDs, we disregard these adjustments.

I have a related question concerning accrued interest on CDs. Some investment firms include accrued interest on CDs in the total year end value and some don't. Do most of you include the accrued interest in your EOY accounting or do you just show what is actually received (the docs we use do not address this issue)?

[Guest deathbycashcall]

We always accrued the interest on CD's held at banks. I don't recall any brokerage houses that ever did NOT report the accrued interest. In my opinion, accrued interest should always be included in the valuation.

I think that the fair market adjustment cannot be ignored for 5500 reporting purposes, regardless of whether the asset is a CD, bond or other interest-sensitive investment. I don't have any cites to quote but I do recall working with auditors who insisted that guaranteed accounts held at insurance companies must be reported on Form 5500 at FAIR MARKET VALUE which was different than the valuation reported on participant statements. The insurance company provided a FMV that appeared to be factoring in either a negative market value adjustment or an early withdrawal penalty.

However, I can certainly see why a trustee would want to disregard market value adjustments for CD's. In a rising interest rate environment, it's a hard sell to employees to say they lost money with fully-insured CD's. But bonds are really no different from CD's......if held to maturity, the investment return is always known. So the same logic should apply...or should it?

Do you handle bonds differently than the CD's?

[mming]

I think the determining factor in whether or not to take into consideration unrealized gains or losses on an investment is whether it has an ample secondary market, so I do handle individual bonds differently than CDs and show an adjustment at year end. However, I must say that the individual bonds I see in plans are usually held to maturity. We do have some plans, though, that hold bonds with maturity dates that are decades away that I cannot imagine will be held until maturity.

Regarding the GICs, I can maybe see why an auditor would make adjustments given the insolvency of some insurance companies in the '90s - although perhaps that's a stretch. But since CDs are backed by the FDIC, they would appear to be bulletproof.

[Bird]

I agree that the bonds should be valued at FMV. Whether there's an intent to hold them until maturity or not is irrelevant.

As for the CDs...they should be at FMV too. The value on a brokerage statement should be good. But, I'm pretty sure we have a few clients that have CDs held directly at banks and we're just getting the accrued interest on them, which is wrong. As long as it's a small fraction of the total assets, I'm not going to worry about it.