This type of retirement plan combines aspects of defined benefit and defined contribution plans. Employers contribute to individual accounts for their employees, aiming for a specific retirement income target. Unlike traditional defined benefit plans, the final benefit is not guaranteed, but rather dependent on investment performance and actuarial factors. Similar to a defined contribution plan, the contributions are typically fixed, and individual account balances fluctuate with market conditions. A hypothetical illustration involves an employer setting a target benefit of 60% of the employee’s final salary upon retirement and contributing regularly to achieve this goal. However, the actual payout could be higher or lower depending on the plan’s overall investment performance.
Such a structure offers several potential advantages. For employers, it provides more predictability and control over contribution costs compared to traditional defined benefit plans. For employees, it offers the potential for a higher retirement income than a defined contribution plan, while also providing more transparency and portability than traditional defined benefit plans. Historically, these plans emerged as a response to the increasing costs and complexities associated with managing traditional defined benefit pensions. They represent an attempt to balance the needs of both employers and employees in a volatile economic environment.
