Final answer:
The accumulated benefit obligation (ABO) is a measure used in pension accounting, which calculates the present value of future retirement benefits based on current and prospective salary levels, covering both vested and nonvested benefits in a defined benefit plan.
Step-by-step explanation:
The term you’re asking about is associated with retirement and savings plans within the realm of employee compensation and benefits. The accumulated benefit obligation (ABO) is a measure used in accounting for pension plans. It represents the present value of the future retirement benefits that have been earned by employees to date, adjusted for expected future salary increases.
This measure encompasses both vested benefits, which are the benefits that employees are entitled to receive regardless of whether they remain with the employer, and nonvested benefits, which employees earn the right to receive upon meeting certain conditions like length of service.
Key components of employee compensation include not only wages but also supplemental pay, insurance, health benefits, and contributions to defined benefit and defined contribution pension plans. These latter two are types of retirement and savings options provided by employers.
A defined benefit plan, in particular, promises a specific benefit at retirement, often based on factors such as salary history and length of employment. In contrast, a defined contribution plan, such as a 401(k), provides a retirement benefit based on the contributions made to the plan and the performance of the investment options. Companies are legally required to fund their defined benefit plans sufficiently to meet the anticipated obligations—which includes ABO.