A target benefit plan is a hybrid plan resulting from crossing a money purchase plan with a defined benefit plan. It is like a defined benefit plan in that the contributions are set to achieve a "target" benefit at retirement, and like a defined contribution plan in that contributions to participant accounts are not adjusted for gains and losses to the plan. If a participant's account earns less than the assumed interest rate, the participant will end up short of the target, just as the participant will end up with more than the target if the account earns more than the assumed interest rate.
As in a money purchase plan, the contributions are mandatory; even if the employer has a bad year. Because older participants are closer to retirement age, contributions for these participants will often be substantially higher.
A target benefit plan is ideal for small employers who, at times, have few, and at other times, have no employees.
Each participant has an individual account in a target benefit plan. Gains and losses are allocated to the account and accumulate in the same manner as a participant's money purchase or profit sharing account. The benefit payable at retirement will be that benefit which can be provided by the actual account balance at retirement. This is true no matter the target, or assumed benefit, used for funding purposes.
In all other respects, the target benefit plan operates as a money purchase plan. The plan sponsor must meet the minimum funding requirements and, therefore, a contribution is required each year. An actuarial certification is not required; however, the calculation of the required contribution is an actuarial calculation based upon the years remaining to the participant's retirement date and the target benefit under the plan. Target benefit plans are often attractive because such plans allow an employer to avoid the complicated funding and accrual rules of defined benefit plans while striving to provide a certain level of retirement income to participants.
Target benefit plans have largely been replaced by new comparability profit sharing plans.