Target Benefit Plans vs. Defined Contribution Plans
What is a Target Defined Benefit Plan?
CEB Solutions offers a target defined benefit plan. A target defined benefit plan is a pension plan that offers security and peace of mind. Participants enrolled in a defined benefit plan have top-tier management, trusted benefits specialists, and investment professionals dedicated to overseeing their pension plans.
Being part of a target benefit plan also means sharing risks and rewards within a community or group of participants. For example, at CEB Solutions, our participants belong to a group of Christian education organizations from across the country coming together to offer benefits to their employees.
Plan participants can have peace of mind knowing that they will have a secured benefit for the rest of their life and need not worry about outliving their investments. Many believe they can do better managing their money themselves, but studies show that on average this has not been the case. In a study titled A Better Bang for the Buck 3.0: Post Retirement Experience Drives Pension Cost Advantage Fornia and Doonan conclude “Despite notable changes in the retirement benefit landscape since 2008, including some improvement in DC performance and fees, DB pensions retain their cost advantage as a means of providing retirement benefits to workers.”
How Does a Defined Contribution Plan Differ from a Defined Benefit Plan?
To supplement the CEBS Pension Plan, wise investors will also save using a defined contribution plan. Using both the CEBS Pension Plan and a defined contribution investment, along with government sources for retirement income, a retiree can have adequate savings for their entire retirement.
While target benefit plans provide a benefit for life during retirement, a defined contribution plan builds up a pool of money which each participant needs to invest, manage, and monitor to draw from during retirement.
The predictability of a target benefit plan and the disbursements of a defined contribution plan can provide the resources needed for retirement. The main differences between these two approaches are:
Benefit for Life: Defined contribution plans offer a fixed account balance, but you may outlive the funds in the plan. Target benefit plans provide a retirement benefit for life, you never outlive your benefit.
Investment Strategy: Target benefit plans typically pool contributions into a collective fund managed by investment professionals to achieve the desired retirement benefit. This contrasts with defined contribution plans, where individuals select their options, manage their accounts, and are responsible for paying any associated fees.
The three keys to healthy retirement savings are a strong pension plan, a pool of capital built from defined contributions over time, and government sources such as the Canada Pension Plan (CPP) and Old Age Security (OAS).
Understanding these nuances can seem overwhelming, but it boils down to these two key differences. If you have further questions about your pension plan, don't hesitate to contact our Christian Education Employee Benefits Team at CEB Solutions (brenda.addie@cebteam.org or 877.274.8796 x 231).