What Is a Target-Benefit Plan?

A target-benefit plan is a type of retirement plan that bases the benefits provided to plan members based on the performance of the investments made with the funds contributed to the plan. This means that while there is a goal or target for the level of benefits that each participant will receive after reaching retirement age, there are no guarantees that those benefits will be at that projected target. The elements of this type of plan are usually presented as a hybrid of defined benefit plans and the money purchase plans that are sometimes employed to create some sort of ongoing revenue stream.

With a target-benefit plan, the process will involve periodically reassessing the level of contributions that will be necessary in order to provide the benefits projected. From time to time, this means that an assessment of the plan will occur, including the valuation of the assets purchased with the contributions and how well they are performing in terms of producing the desired level of returns. It is not unusual for a target-benefit plan to be reassessed on an annual basis, with the process beginning either a year or two after a participant enrolls in the plan and begins to make the mandatory contributions that are necessary to continue that enrollment.

In most nations, there are some sort of limitations on how much a participant may contribute annually to a target-benefit plan. The limitation may be based on a fixed percentage of the contributor’s income, such as the compensation from an employment position. At other times, the maximum amount of the annual contribution is identified as a specific figure, with that figure subject to revision by governmental tax and revenue agencies. Setting these limitations help to ensure that a target-benefit plan cannot be changed so that participants can use it to offset more than a certain amount of taxes by making contributions, while also preventing plan administrators from requiring annual contributions that are not within reason, given the income levels of the contributors.

The concept of the target-benefit plan has been touted as a reasonable way to create a retirement nest egg, especially for individuals who are beginning the process later in their working lives, or who find themselves having to rebuild retirement assets after losing them during a market crash or a prolonged period of recession. Since the plans do carry some degree of risk, it is important to compare the merits and potential liabilities of this approach with other means of saving for retirement. Doing so will allow the individual to choose the strategy that is the most appropriate for his or her financial circumstances.