Target Benefit Plan
What Does Target Benefit Plan Mean?
A target benefit plan is a type of employer-sponsored retirement plan. When the employer establishes the plan, they provide each employee with an estimate of the payout they would receive during retirement, known as the target benefit. The employer then calculates how much they need to contribute to the plan each year, based on an assumed investment return, to ensure enough funds are accumulated to pay the future employee benefits. However, the actual amounts employees receive may be higher or lower, 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 faces a funding shortfall, the employer is responsible for contributing more to make up the difference.
In contrast, with a target benefit plan, employees are responsible for covering any shortfall. The employer contributes a fixed amount to the plan each year, regardless of investment performance. If the investments perform poorly, employees will receive less in retirement. On the other hand, if the investments perform better than expected, employees will receive more. In a pension plan, a better investment return does not result in higher retirement payouts.
