What is a target-benefit plan?
A target-benefit plan is a retirement plan that offers monthly benefits to the participants. The contributions are determined by a projected retirement benefit and participant distributions are based on the investment performance. The market does impact this type of benefit plan, so when the market is performing well, the monthly benefits will increase. Nevertheless, because the distributions that participants in a target-benefit plan receive at retirement are based on the performance of the plan’s investments, they are not guaranteed. With a target-benefit plan, contributions are required, whereas with other plans, the employee might have an option whether to contribute.
Learn more about a target-benefit plan
When do I need to be aware of a target-benefit plan?
An employee interested in preparing for the future should learn more about a target-benefit plan and how it can be advantageous in retirement. Whether the individual is getting close to retirement or is decades away, it’s never too late to get started with saving for the event.
What is important to know about a target-benefit plan?
When you invest money into a target-benefit plan, you are doing so to generate a return that you can use during retirement. Although you always run the risk of not having enough money at retirement, target-benefit plans offer certain advantages:
- Because there’s a risk that the employee won’t have enough funds at the time of retirement, many employees contribute more and end up benefiting more.
- Older participants often experience greater benefits because age is a determining factor in contributions for a target-benefit plan.
- Most employers can utilize a target-benefit plan, though they are more appropriate for certain types of employers such as those who do not have too much discretion over annual contribution levels.
- Employer contributions and funds held in the plan account are not considered taxable income as long as they are in the plan.
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