Final answer:
The FASB considers the Projected Benefit Obligation as the most realistic measure for employers' obligations in pension plans when determining service cost, due to its comprehensive inclusion of future compensation assumptions.
Step-by-step explanation:
The Financial Accounting Standards Board (FASB) argues that the Projected Benefit Obligation (PBO) is the measure that indicates a more realistic measure of the employer's obligation under the pension plan on a going-concern basis. The PBO should be used as the basis for determining service cost. It includes not only the benefits earned for past service but also the benefits employees are expected to earn in the future, in addition to incorporating assumptions about future compensation levels. This is more comprehensive compared to the Vested Benefit Obligation (VBO) and the Accumulated Benefit Obligation (ABO), which do not account for future salary increases.
Defined contribution plans like 401(k)s and 403(b)s, which are more prevalent today, rely on fixed contributions from employers to a retirement account, which the employee can also contribute to, and are invested in a range of vehicles. These contributions are tax deferred and portable, ensuring that an individual's retirement savings can move with them to a new employer.