But this is not just an issue for large plan filers. Small plan filers should take note of these rules, too.

Stable value investments, including traditional guaranteed investment contracts (GICs), synthetic GICs, stable value funds, and some common/collective funds, invest in diversified portfolios of contracts with insurance companies, banks and other financial institutions, with their primary purpose generally being to preserve principal while seeking a high level of current income. In addition to many insurance contracts and common/collective funds that are considered stable value funds, examples of such funds offered by Fidelity, Principal, Vanguard, and other institutions include:

Fidelity Managed Income Portfolio I
Fidelity Managed Income Portfolio II
Fidelity Advisory Stable Value Fund
Principal Fixed Income Option
Principal Fixed Income Guaranteed Option
Gartmore Principal Stable Value Fund
Vanguard Retirement Savings Trust Fund
Wells Fargo Stable Value Fund
Putnam Stable Value Fund
American Century Stable Asset Fund

In December 2005 the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) AAG INV-1 and SOP 94-4-1, “Reporting of Fully Benefit-Responsive Investments Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide and Defined-Contribution Health and Welfare and Pension Plans.” This Standard (a) described the limited circumstances in which the net assets of an investment fund should reflect the contract value (which generally equals the principal balance plus accrued interest) of certain investments that it holds and (b) provides a definition of a fully benefit-responsive contract. This FSP also provides guidance with respect to the financial statement presentation and disclosure of fully benefit-responsive investment contracts. FSP AAG INV-1 and SOP 94-1-1 is effective for fiscal years ending after December 15, 2006.

An unexpected challenge is determining just which contracts are “fully benefit responsive.” Financial institutions and accountants are working to coordinate the information that must be shared to accommodate these new rules, but there’s no best practice or standard reporting format developed just yet. However, it will alter the information that appears in the Statement of Net Assets Available for Benefits portion of the auditor’s report. The following example compares the format changes.

Prior Presentation	Statement of Net Assets Available for Benefits
	2006 2005 Participant-directed investments (Note x) $2,000 $1,500 Net assets available for benefits $2,000 $1,500
New Presentation	Statement of Net Assets Available for Benefits
	2006 2005 Participant-directed investments, at fair value (Note x) $2,700 $ 900 Net assets available for benefits, at fair value $2,700 $ 900 Adjustment from fair value to contract value for fully benefit-responsive contracts (700) 600 Net assets available for benefits $2,000 $1,500

In addition, a note to the financial statements will provide more details about the underlying assets of the stable value investment. In the case of a synthetic vehicle, the disclosure will include:

• A description of the contracts, how they operate, and the methodology used to calculate the crediting rate;
• The average yield earned by the plan for all fully benefit responsive investment contracts for each period for which a statement of net assets available for benefits is presented;
• The average yield earned by the plan for all fully benefit responsive investment contracts with an adjustment to reflect the actual rate credited to participants for each period for which a statement of net assets available for benefits is presented;
• A description of the events that limit the fund’s ability to transact at contract value (premature termination of the contract, plan closings, layoff, etc.); and
• A description of the events and circumstances that would permit the issuer to terminate the contract.

Form 5500 Reporting
Form 5500 reporting rules have historically required fully benefit responsive insurance contracts to be reported at contract value, while stable value funds and synthetic contracts have been recorded at fair [market] value. There have been no changes to the Form 5500 instructions and the rules described above do not change the information to report on Form 5500, although some situations may require a reconciling footnote to the financial statements if, for example, stable value funds have not been reported at fair value in the past. In many instances the difference between fair value and contract value is not material.

It should be noted that fair value should be reported for insurance contracts that are not fully benefit responsive; however, preparers have often reported contract value because that was the only information provided to them.

Follow these tips:

• If the plan does not invest in any insurance contracts held in the general account of an insurance company, then all investments are reported at fair value on Schedule H / Schedule I.
• If the plan invests in insurance contracts held in the general account of an insurance company, then

                a.  Contracts that are fully benefit responsive are reported at contract value on Schedules H / I.

                b.  Contracts that are not fully benefit responsive are reported at fair value on Schedules H / I.

• With regard to Schedule A, contract value is reported at line 6; however, fair value is reported at line 3 if the contract is not fully benefit responsive. If the contract is fully benefit responsive, then line 3 is left blank and line 6 shows contract value.

Resources
To familiarize yourself with the issues auditors are facing, a copy of the FASB FSP can be viewed at: http://www.fasb.org/fasb_staff_positions/fsp_aag_inv1&sop_9441.pdf. In addition, every consulting firm should have on hand a copy of the AICPA Audit and Accounting Guide for Employee Benefit Plans (www.cpa2biz.com) which is updated annually. The 2007 edition has an excerpt from SOP 94-4 in Appendix I. The AICPA also issued a Tax Practice Aid (TPA 6931.08) to answer several common questions about the new FSP.

In Conclusion
Fair value reporting applies to both large and small plans; however, small plans may not automatically get the fair value information they need to satisfy the Form 5500 reporting rules. The total value of participant balances equals the Schedule I values for most small plans. However, this new FSP is drawing attention to the discrepancy between the reality of recordkeeping (using contract value) and Form 5500 reporting (using fair value). Unless DOL changes its regulations, this variation will exist for all defined contribution plans with stable value type investments.