Target Benefit Plan - Targets

Targets

A target may be set based on final salary. For example, if the defined benefit plan being "targeted" has a benefit of 1.5% of the final salary for each year of credited service, payable at age 65, then the contribution level for a 25-year-old entrant is found by an actuary calculating what contribution level would result in a benefit of 60% of the entrant's final salary. This requires the use of actuarial assumptions of interest rates, salary growth and mortality. If the assumption for salary growth is less than that for interest then the contribution rate for older entrants would be greater than that for younger entrants.

Because a target benefit plan is a defined contribution plan and because most defined contribution plans shift investment risk to the plan participant, there is no guarantee that the target will be met, because the assumptions may not be borne out. If actual salary growth exceeds the level assumed then the actual benefit will tend to be lower than the targeted amount. If the actual investment returns exceed those assumed then actual benefits will tend to be higher than the targeted amount.