How do target benefit plans differ from defined-contribution plans

The approximate amount of pension benefit paid under target benefit plans is usually known. While it is less certain than the pension paid under a defined benefit plan, there is far more certainty of an approximate amount to be paid than the outcome with a defined-contribution plan. The benefit that will be available in a defined contribution plan is not known until very near retirement. 

Individuals who have defined contribution plans make investment decisions largely on their own. All too often, however, the majority of people are not well-enough informed or qualified to make their own investment decisions. Studies have shown that plan administrators and investment professionals make better investment decisions than individual employees. With target benefit plans, assets are pooled and invested in a similar manner as for defined-benefit plans. This is likely to result in better economies of scale and better investment performance than defined-contributions can provide.

Target benefit plans also pay a pension over retirees’ lifetimes. Retirees may have to be concerned with some benefit reductions if their plan’s performance is poor over a period of time, but they will usually not have to be concerned with whether or not they will outlive their retirement savings. 

Target Benefit Plans 101: