Target benefit plan

A benefit plan that is similar to a defined benefit plan since contributions are based on projected retirement benefits. However, unlike a defined benefit plan, the benefits provided to participants at retirement are based on the performance of the investments, and are therefore not guaranteed.

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The target benefit plan also bears some similarity to a money purchase plan as contributions are mandatory. Generally speaking, a target benefit plan is a cross between a money purchase pension plan and a defined benefit plan.

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Type of pension in which benefits may vary depending on the investment performance of the pension plan assets. Contributions are made to fund a target benefit, such as 35% of compensation, using acceptable mortality and interest rate assumptions. Funds are invested wholly or partially in such vehicles as variable annuities or mutual funds, and benefits may exceed or fall below target levels depending on investment performance. Target plans are subject to the same annual contribution limits for individual participants as a Money Purchase Plan. See also Variable Dollar Annuity.

A target benefit plan is a type of pension plan that contains features of a defined contribution plan but is made to appear like a defined benefit plan.

It is similar to defined benefit plan in that the annual contribution is determined by a formula to calculate the amount needed each year to accumulate (at an assumed interest rate) a fund sufficient to pay a projected retirement benefit, the target benefit, to each participant upon reaching retirement. It is similar to a defined contribution plan in that the plan does not guarantee any benefit will be paid. The plan's only obligation is to pay whatever benefit can be provided by the amount in the contributor’s account. The actual earnings on the individual accounts may differ from the estimated earnings used in the assumptions and the investment performance of that account through the years.^[1]

References

1. ^ The Motley Fool Retirement Plan Primer Retrieved on July 23, 2007

See also

• 401(k)
• Individual Retirement Account
• Retirement plan

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