Target-Benefit Plan

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Target-Benefit Plan

A pension plan with a defined contribution but no guaranteed payout. That is, when the annuitant purchases the plan, he/she makes a contribution each month according to a formula that is most likely to result in a certain payout when he/she begins receiving payments. The formula assumes a certain interest rate and/or market movements will take place. If these do not occur according to the formula's projections, the plan's operators are under no obligation to provide the projected payout. Instead, they provide what the contributions have actually earned over the life of the pension.
References in periodicals archive ?
The plan would be defined contribution for the self-employed, but could be a target benefit plan for employees at the option of employers.
For this reason, these plans fall into the category of "target plans"--the Alberta-British Columbia report refers to them as "specified contribution target benefit plans.
Referring to these as "specified contribution target benefit plans," the panel recommends that they regularly disclose their solvency position but be exempted from any requirement to make other than going-concern contributions.
To fill this void, the report proposes the creation of jointly governed target benefit plans.
Proposals include: making greater use of electronic delivery of information (Alberta-British Columbia and Ontario); providing information annually to retirees (Ontario); and requiring target benefit plans to identify the contingent nature of promises (Alberta-British Columbia and Ontario).
The funding component would be required for defined and target benefit plans and include a summary of the risks to which the plan's funded status is exposed and the risk-mitigating policies of the plan.
While most of what they have to say is familiar, the Ontario report provides a useful breakdown of DB coverage in single employer DB plans, jointly sponsored plans, and multi-employer target benefit plans, each of which has roughly equal numbers of members.
Since contributions are fixed like a DC plan but investment, interest rate and longevity risks are pooled, like a DB plan, target benefit plans have many advantages for participants.