Target-Benefit Plan

What Is a Target-Benefit Plan?

A target-benefit plan is one that is like a defined benefit (DB) plan in what contributions depend on projected retirement benefits. Nonetheless, not at all like a defined benefit plan, the distributions that participants in a target-benefit plan receive at retirement depend on the performance of the investments and are, consequently, not guaranteed.

Note that a target-benefit plan isn't equivalent to a target-date fund, which might be found in defined contribution (DC) retirement accounts like 401(k) plans.

How a Target-Benefit Plan Works

Target-benefit plans have a few credits of pension plans in that they offer a month to month benefit to the participants or employees. Notwithstanding, a target-benefit plan shifts the risk of whether there are an adequate number of funds in the plan to the employees, though in a pension plan, the risk is exclusively on the employer to give the benefits.

A target-benefit plan furnishes employees with an estimated target of the month to month benefit, yet that target can change over the long haul, contingent upon the investment returns. At the end of the day, there's no guarantee that the month to month benefit will be there in retirement, nor is there a guarantee of the month to month amount.

The target-benefit plan likewise bears a few similitudes to a money purchase plan in that contributions are mandatory. In a money purchase plan, an employee or employer makes annual contributions as per the percentage that the plan requires. For instance, a plan that requires a contribution of 5% means the employer contributes 5% of each eligible employee's pay to their separate account annually. Contributions must be made whether the business creates a gain.

Defined-Contribution Plans

A target-benefit plan shares a few likenesses to a [defined-contribution (DC) plan](/definedcontributionplan, for example, a 401(k). Defined contribution plans are those retirement plans in which employees contribute a fixed amount or a percentage of their paychecks each cycle. An employer will frequently match an employee's standard contribution to a DC plan.

In both a DC plan and target-benefit plan, the funds are invested to produce returns with the goal that there will be sufficient money in retirement for the employees. Likewise, like a 401(k), employees bear the risk that there probably won't be sufficient money in the fund. Be that as it may, the benefit paid to the employee under a target-benefit plan-albeit not guaranteed-can be more certain than the benefits under a defined contribution plan.

Target-Benefit Plans versus Defined-Benefit Plans

There are downsides to both DB and DC plans. While defined-benefit plans expect employers to face bigger challenges, defined-contribution plans shift the burden of these risks onto the individual workers and retired folks. Both have had mixed results.

Defined benefit plans are marginally more extensive in scope than target-benefit plans. In a defined benefit pension plan, a participant receives a fixed benefit in retirement in view of compensation, age, and long stretches of service with a specific employer. DB plans are guaranteed by the Pension Benefit Guaranty Corporation (PBGC), a federal government agency, while target-benefit plans are not guaranteed.

Cash Balance Plan

There are different varieties of defined benefit plans that incorporate a cash balance. In a cash balance plan, an employer credits a participant's account with a set percentage of their yearly compensation plus interest. The company exclusively bears all ownership of profits and losses in the portfolio.

412(e)(3) Plan

In a tax-qualified 412(e)(3) plan, intended for small businesses, any amount that the owner adds to the plan opens up quickly as a tax deduction to the company. The investments that can fund this type of plan are guaranteed annuities or a combination of annuities and life insurance. 412(e)(3) plans are completely insured plans.

The asset or investment values, as well as the month to month benefits in target-benefit plans, are moving targets. All in all, the benefits are diminished following market slumps and increased when the market performs well. Nonetheless, target-benefit plans can offer more certainty than defined-contribution plans. Target-benefit plans have emerged in many spots outside of the U.S., including the U.K. also, the Netherlands.

Features

• Target-benefit plans in all actuality do offer more certainty than defined-contribution plans or 401(k)s.
• A target-benefit plan offers contributions that depend on projected retirement benefits.
• The market impacts a target-benefit plan.
• It is like a defined benefit plan, yet, dissimilar to a defined benefit plan, the retirement distributions paid to participants in a target-benefit plan are not guaranteed.
• Month to month benefits in target-benefit plans can increase when the market performs well, however decline following market slumps.

FAQ

Is a Money Purchase Pension Plan a Defined Benefit Plan?

Indeed, a money purchase pension plan is a defined benefit plan. It is an employer defined-contribution benefit plan, similar as a 401(k) plan. The difference between a 401(k) and a money purchase pension plan is that contributions are exclusively made by an employer, not the employee. The contributions are additionally fixed on an annual basis.

Could I at any point Have a 401(k) and a Defined Benefit Plan?

Indeed, you can set up a defined benefit plan and a solo 401(k) plan, which is known as defined/benefit 401(k), or DB(K). The passage of the Pension Protection Act of 2006 (PPA) considered this.

Does a Target-Benefit Plan Favor Older Employees?

Indeed, target-benefit plans generally favor more established employees. This is on the grounds that a characteristic of target-benefit plans is age being one of the determinants of plan contributions.