DECEPTIVE USE OF “NET ASSET VALUE” IN PENSION PLANS

Many pension plans deceptively use “net asset value” for valuing plan assets–and therefore do not present a fair picture of “current value.” This means that if you need to access money in your pension account, you might have much less money available than the asset value displayed in your account information.  Why is this, and what is the problem?

Investments held in a “collective investment trust” often track asset values based on “net asset value” (NAV) rather than fair market value. These net values are not publicly reported or accessible.

By contrast, the term “fair market value” is used when the plan asset can be traded on an active trading market, such as a stock market. If your plan assets are valued at fair market value, you can be sure that the “current value reported” is accurate and the money you think you have available is actually available.

But assets valued at “net asset value” (NAV) may present an illusory valuation picture of your plan assets. The term “net asset value” is typically used for assets that do not have an active trading market, but are instead are traded in bilateral “over the counter” (OTC) transactions between two parties.  Since the two parties to the OTC contract set the price of the asset, there is no way to readily validate or confirm the actual fair market value of that particular trade.

Further, these OTC contracts (plan assets) stay on books at the contract value set by the OTC contract parties–a value that can be extremely arbitrary–and the arbitrary valuation can (and does) persist even in face of changing market conditions.  Public stock and bond markets may drop in a negative market environment, but assets designated with a “net asset value” will not automatically follow the downward trend of public markets since the NAV valuation was never based on a market price to begin with.

So what is the problem when this happens? 

If your pension plan has significant assets valued at NAV during a down market, current value will continue to be reported at the (unrealistically high) net asset value, since OTC assets are not automatically repriced by market action.  So if the day comes that you need to withdraw money from your 401(k) plan for personal use, you might have far less actual money in your account than is reported, since valuation is not based on fair market value, but rather, on net asset value.

If your pension assets are held in a collective investment trust and reported at net asset value, we suggest you closely examine the valuation assumptions of your plan assets to make sure that the value of your plan is what you expect it to be. 

We are happy to help with a free consultation. Contact us at 213.600.6077 or [email protected]