What is the primary purpose of using a target benefit plan?

The primary purpose of using a target benefit plan is to provide a flexible contribution structure. Target benefit plans are designed to offer a balance between defined benefit plans and defined contribution plans. They set a target benefit amount that participants aim to achieve by retirement, but contributions can vary based on fluctuations in participant demographics, investment returns, and other factors. This flexibility allows employers to adjust contributions based on the specific needs of their workforce and the financial state of the organization, making it an appealing option for both employers and employees.

Such plans encourage corporations to manage their contributions based on the targeted benefits, but unlike defined benefit plans, they do not guarantee specific benefits at retirement. This distinction is crucial as it offers advantages in adapting to changing financial scenarios while still aiming to provide a specific retirement benefit.