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Target Benefit Plan

A target benefit plan is a cross between a defined benefit plan and a money purchase pension plan. While a target benefit plan is truly a defined contribution plan, it contains a benefit formula similar to that of a defined benefit plan. The annual contribution is determined by the amount needed each year to accumulate (at an assumed interest rate) a contribution sufficient to pay a projected retirement benefit to each participant at retirement age. However, this is where the similarity ends.

In a target benefit plan, once the contribution is made it is allocated to separate accounts maintained for each participant. As in other defined contribution plans, earnings of the fund are allocated to participants.

The only difference between a money purchase plan and a target benefit plan is that, in a money purchase 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 provided a fixed benefit. In a money purchase pension plan, contributions for identically compensated employees are the same even though their ages differ; in a target benefit plan, age is one of the factors that determine the size of the contributions.

Last Updated: 9/23/2012 10:05:00 PM