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Also called an Assumed Benefit Pension Plan, a target benefit plan "targets" a desired benefit level — much like a defined benefit plan — in determining the employer's contribution. This is a defined contribution plan, and once a benefit target has been set, the plan functions like a money purchase defined contribution plan to reach that target.

The target benefit plan identifies a monthly benefit to provide at retirement. Then, using certain actuarial assumptions, the annual contribution needed to provide this benefit is calculated. There is no guarantee that the plan participant's actual retirement benefit will equal the target amount. Instead, the actual retirement benefit is a function of total contributions, investment earnings, and past distributions (if any). The annual contribution remains a fixed percentage of compensation, much like a money purchase pension plan.

Once determined, the employer's contribution remains fixed (so long as compensation remains unchanged), and the target benefit plan operates like a money purchase pension plan, with the ultimate retirement benefit being determined by total contributions and investment performance.

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