Target Benefit Plans

Hybrid benefit plans have certain features of both defined benefit and defined contribution plans. One type of hybrid plan, known as a target benefit plan, is something you should consider checking out because it can be structured to provide you, the owner, with better benefits than you might get in other plans.

What is a target benefit plan? A target benefit plan is a plan in which you, as the employer, establish a target benefit for your employees, but where each employee's actual pension is based on the amount in the employee's individual account. In that sense, target benefit plans combine elements of defined benefit and defined contribution plans. Also known as "hybrid plans," these plans use a formula to define the distribution of benefits and at the same time they take the cash contribution feature from the defined contribution plan.

How do target benefit plans work? The best way to see how they work is to check out our case study. We've provided an example that compares a straight profit-sharing plan with a target benefit plan.

What's the catch? There are some disadvantages to target benefit plans that you should know about if you're considering offering one. Be sure to ask your financial adviser whether a target benefit plan makes sense for you.