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Target Benefit Plan

Key Features

  • Combines elements of benefit and contribution plans
  • Work best for middle-age participants

A target benefit plan is a type of pension plan which combines elements of defined benefit and defined contribution plans. The projected retirement benefit is defined by formula as with a defined benefit pension plan. This becomes the "target" benefit. Funding is actuarially determined based upon the target benefit and that amount is allocated to the participant's account.

After the first year, actuarial valuations to redetermine the contributions are not made. The contribution remains constant for the benefit being targeted. Gains or losses are allocated to the participant's account based upon the experience of the plan. At retirement the participant actually receives the then value of the account held in his or her behalf.

Target benefit plans are intended to combine the benefits of both defined benefit and defined contribution plans, in that they allow older participants to receive a disproportionate share of the contributions, and at the same time they allow the accounts to grow based upon actual investment performance. They tend to work best for middle-age participants.

Since target benefit plans are legally considered to be defined contribution plans, contributions on behalf of a participant are limited to the lesser of $40,000 or 25% of current compensation.

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