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Target Benefit Plan
A target benefit plan is a hybrid or cross between a Defined Benefit Pension Plan and a Money Purchase Pension Plan. It is like a defined benefit plan in that the annual contribution is determined by the amount needed each year to accumulate (at an assumed rate of interest) a fund sufficient to pay a projected retirement benefit (the target benefit) to each participant on reaching retirement age.
This is where the similarity ends. In a defined benefit plan, if the actual experience of the plan differs from the actuarial assumptions used (for example, if the interest earned is higher or lower than the assumptions), then the employer either increases or decreases its future contributions to the extent necessary to provide the promised benefits. In a target benefit plan, however, the contribution, once made, is allocated to separate accounts maintained for each participant. Thus, if the earnings of the fund differ from those assumed, this does not result in any increase or decrease in employer contributions; instead, it increases or decreases the benefits payable to the participant.
In this regard, the target benefit plan operates like a money purchase pension plan. In fact, the only difference between a money purchase pension plan and a target benefit plan is the manner in which contributions are determined. In a money purchase pension plan, contributions are generally determined and allocated as a percentage of current compensation; in a target benefit plan, contributions are determined as if the plan were to provide a fixed benefit. In a money purchase pension plan, contribution for identically compensated employees are the same even though their ages differ; in a target benefit plan, age is one of the factors that determines the size of the contributions.
At retirement, the accumulated value of each participant's account is used to provide retirement benefits. At that time, the actual retirement benefit provided is likely to differ from the "target" benefit.