2023 Feb 15Fair Market Value


Pension assets must be valued and reported at “fair value.” The goal, of course, is to categorize each asset by its characteristics and risks, so that value can be most readily understood and acted upon by (a) plan fiduciaries in making discretionary investment decisions and (b) by plan participants in selecting investment options from the menu presented by the plan.

fair value hierarchy


 The first question to ask is what is “fair value?” Is it fair market value (a concept most people understand) or is it something else? The plan administrator must make every effort to equate the asset values of the plan to the understandable, non-confusing measure of fair market value so that plan participants understand the value of their investments, and are therefore able to make sound investment decisions.

Fair market value is:

the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Unfortunately, many plan administrators avoid marking assets to fair market value, and instead, use a vague measurement know as “net asset value” (NAV). NAV is nothing more than a nominal value assigned to an asset for easy bookkeeping, and typically bears no correlation to an assets fair market value. This is a primary way plan administrators hide asset value from plan participants and make a pension menu offering incredibly complex and opaque.


To make valuation measurements market-based, and as close to fair market value as possible, a fair value hierarchy was designed by the Financial Accounting Standards Board (FASB), embodied in FAS 157. This valuation standard distinguishes among three levels of value. The levels of value are largely based on how clear the valuation method is–or is not.

Prior to the release of FAS 157, there were various definitions of fair value dispersed among the many FASB pronouncements and limited guidance for applying the standards in compliance with GAAP. These differences created inconsistencies, unnecessary complexity, and a need for comparability among fair value measurements as well as expanded disclosures.

By creating a single, comprehensive definition of fair value, the FASB hoped to improve the transparency of corporate accounting practices and provide a standard framework for valuation.

Under the fair value hierarchy, the dividing line between Level 1 and level 2 is straightforward: if an asset is valued based on a quoted price of that asset on a public active market, it is Level 1. This is the notion of fair market value that is easily understood by plan participants.

The valuation quagmire begins at Level 2. Valuing an asset in Level 2 requires a significant amount of discretion on the part of the plan fiduciary. In an ERISA setting, this discretion must be exercised in the best interest of plan participants, owing to the fiduciary duty imposed on plan fiduciaries.

A more detailed review of the valuation hierarchy is as follows:


Level One: Observable quoted prices for the asset in publicly-traded active markets for identical assets or liabilities at the measurement date.


Level Two: Observable inputs other than quoted prices for the asset or liability, either direct or indirect, including:

(a) Quoted prices for similar assets or liabilities in active markets.

(b) Quoted prices for identical/similar assets or liabilities in markets that are not active; ie.g., OTC transactions between two parties.

(c) Tangential inputs from which a price might be inferred, such as yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates.

(d) Inputs that can be corroborated in some other means (market-corroborated inputs).


Level Three: Unobservable inputs, developed from the reporting entity’s assessment of market participant assumptions, based on the best information available under the circumstances.


Net asset value (NAV) is an incredibly vague valuation standard that, really, is no standard at all. NAV is used when the valuation expert is unable to categorize an asset value in Levels 1, 2, or 3. This is the least informative valuation standard that could be chosen.  It is therefore the category of choice when valuation information is to be hidden from view.


ERISA fiduciary duties make a plan fiduciary accountable for the discretionary choices made to value plan assets according to the fair vaue hierarchy.

This valuation duty is front and center of every litigation evaluation we perform. At the end of the day, well-performing assets are a function of a correct valuation.  And a participant can only choose among investing options presented to him or her if a correct valuation attaches to each asset.

The following additional assumptions help a valuation expert assess and apply the correct value to an asset:

Orderly Transaction

FAS 157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability.” Although FAS 157 specifies a measurement or valuation date, it does presume the asset/liability’s exposure to the market for a certain period, to allow for usual and customary market activities.

valuation approaches

FAS 157 requires using valuation techniques consistent with the three traditional approaches (market, income, and/or cost approach), and “that are appropriate in the circumstances and for which sufficient data are available to measure fair value.” Such techniques should be consistently applied; a change is appropriate (for example, to the weighing of the various methods) only if it is a better representation of fair value.

measurement date

The valuation measurement date is essential to any fair market value assessment.  And the valuation date is most often the closing date of a transaction or exchange. Also critical to valuation measurement are any investment conditions that may affect value, such as unrealized losses and redemption limitations or restrictions.


FAS 157 includes market participant assumptions about risk; e.g., the risk inherent in a particular valuation technique (such as a pricing model) and/or the risk inherent in the valuation inputs. “A fair value measurement should include an adjustment for risk if market participants would include one in pricing the related asset or liability,” the Statement explains, “even if the adjustment is difficult to determine.” For instance, a “mark-to-model” measurement that does not include a risk adjustment would not represent fair value if market participants would include an adjustment in pricing the
related asset or liability.

If a plan fiduciary has faithfully followed guidance of FAS 157 in valuing plan assets, and has made best efforts to categorize each asset within the fair value hierarchy, his or her job will have been well done.

Conversely, if a fiduciary fails to apply FAS 157 properly and fails to exercise the required valuation discretion in the best interest of plan participants, a fiduciary breach will be present.

Close examination of the valuation techniques used by the plan fiduciary to disclose pension risk to participants is essential to any litigation evaluation we perform. Understanding valuation is THE key to making good valuation choices between risk and reward.

fair value hierarchy



Kevin McBride is a Pension & Benefits Litigation Attorney in Los Angeles, California, USA.

He is admitted into three California US District Courts (Central, Southern, and Northern), the US District Court for the District of Utah, the Ninth Circuit Court of Appeals, and the Federal Circuit Court of Appeals. McBride holds a BA degree in Economics from the University of Utah and a JD from the University of Utah College of Law, where he served on the Utah Law Review. He is a member of the Federalist Society and the Federal Bar Association.