Introduction
Target-benefit plans are those plans that are similar to defined benefit plans under which the contributions are made depending on the forecasted benefits of retirement. Nevertheless, very much unlike defined benefit plans, the distributions that subscribers of target-benefit plans receive once they retire are dependent on the performance of the investments made and are hence never guaranteed.
Breaking Down Target-Benefit Plans
Target-benefit plans are going to bear some resemblance to a cash purchase plan in which making contributions are compulsory. In money purchase plans, the employees and employer make yearly contributions as per the extent which is needed in the plan.
For instance, plans that need a contribution of 5% say that the employers and employees contribute 5% each. The eligible employee will make the contributions from his or her account. The contributions will have to be made regardless of the business is making profits or not.
DBPs and TBPs:
Target-benefit plans (DBPs) are comparatively narrower in scope than defined benefit plans (TBPs). Under defined benefit pension plans, the participants will receive a fixed retirement benefit depending on their CTC, age and service tenure with an employer. DBPs are backed by the PGBC, a federal government agency.
Under a cash balance plan, employers will credit the participants’ account with a certain percentage of their annual salary plus interest. The company will solely soak in the ownership of both losses and profits in the portfolio. The only thing that can fund such plans is assured annuities and a blend of life insurance policies and annuity plans.
