What Does Target Benefit Plan Mean?
A target benefit plan is a type of work-sponsored retirement plan. When the employer sets up a plan, they give each employee an estimate of the payout they would receive during retirement, which is the target benefit. Then, the employer calculates how much they need to contribute to the plan each year, with an assumed investment return, to save enough to pay the future employee benefits. The actual amounts the employees receive could be higher or lower though, depending on the plan’s actual investment performance.
Insuranceopedia Explains Target Benefit Plan
A target benefit plan is similar to a pension plan, though the payout to employees is less certain. In a pension plan, employees receive their agreed upon retirement payout, regardless of the plan’s investment performance. If the plan is running short on money, the employer needs to contribute more to make up the shortfall.
With a target benefit plan, the employees make up the shortfall. The employer contributes the same amount to the plan each year, regardless of performance. If the investments don’t do well, the employees end up with less money in retirement. The flipside is that if the investments do better than expected, the employees receive more in retirement. In a pension, a better investment return wouldn’t lead to higher retirement payouts.