Target Benefit Plans vs. Defined Contribution Plans: What You Need to Know
Planning for retirement means understanding how your different sources of retirement income work together. The Christian Education Benefit Solutions offers a Target Benefit Plan. A Target Benefit Plan is a pension plan that offers security and peace of mind. Participants may also choose to save through a Defined Contribution Plan or other personal retirement savings plans. While both help you prepare for retirement, it is important to understand how they work in different ways.
What is a Target Benefit Plan?
A Target Benefit Plan has aspects of both a Defined Benefit Pension Plan and a Defined Contribution Plan but is ultimately designed to provide retirement income for life. Defined contributions from participating employers and employees are pooled into a professionally managed investment fund. Rather than each participant managing their own investments, the plan’s assets are invested collectively to support retirement benefits for all members. Retirement benefits are then determined by the plan’s funding position. Through collective investment, plan members share the risk.
At Christian Education Benefit Solutions, participants are part of a community of Christian education organizations across Canada that work together to provide retirement benefits for their employees. Professional investment managers and Trustees oversee the pension fund, while benefits specialists administer the Plan and support participants throughout their careers and into retirement. With a Target Benefit Plan, participants can have peace of mind knowing that they will have a secured benefit for the rest of their lives and need not worry about outliving their investments.
Many believe they can do better managing their money themselves. However, A Better Bang for the Buck 3.0: Post-Retirement Experience Drives Pension Cost Advantage concludes that target benefit pensions retain a cost advantage in providing retirement benefits. As Fornia and Doonan conclude, "Despite notable changes in the retirement benefit landscape since 2008, including some improvement in Defined Contribution performance and fees, Target Benefit pensions retain their cost advantage as a means of providing retirement benefits to workers."
What is a Defined Contribution Plan?
A Defined Contribution Plan works differently. Contributions are deposited into individual accounts in your name, and the value of that account depends on the contributions made and the performance of the investments you choose or those that are selected on your behalf.
When you retire with a Defined Contribution Plan, your retirement income comes from the money you have accumulated in your account. Since you will be drawing from a personal pool of savings, you are responsible for managing how long those funds will last during retirement through personal and individual investments.
How Do the Two Plans Compare?
Although both types of plans help you save for your retirement, they differ in several important ways.
| Feature | Target Benefit | Defined Contribution |
|---|---|---|
| Retirement Income | Designed to provide ongoing retirement income throughout your lifetime. | Provides an individual account balance that you use to generate income. The amount available depends on contributions, investment performance, and withdrawals over time. |
| Investment Management | Investments are pooled and managed by professional investment managers on behalf of all participants. | Participants typically choose from available investment options and are responsible for the performance of their individual account. |
| Managing Retirement | Provides regular pension payments during retirement. | Participants decide how much and when to withdraw their savings, balancing their income needs with ensuring their savings last throughout retirement. |
| Investment Risk | Investment risk is managed collectively through the pension plan and its professionally managed fund. | The value of the account depends on investment performance, and participants bear the investment risk associated with their individual account. |
Why do many people choose to have both?
For many Canadians, retirement income comes from several sources. A pension provides a foundation of retirement, while personal savings (which could include a Defined Contribution Plan, Registered Retirement Savings Plan (RRSP) or Group RRSP, or Tax-Free Savings Account (TFSA), can help provide additional flexibility and support lifestyle goals in retirement. Government programs such as the Canada Pension Plan (CPP) and Old Age Security (OAS) are also important parts of many retirement income plans.
Together, these sources can create a more secure and balanced retirement.
Have questions?
Understanding your pension is an important part of planning for your retirement. If you have questions about your Christian Education Pension Plan (CEPP), or would like to learn more about how it fits into your overall retirement plan, your Benefit Specialists are here to help!
Contact us at pension@cebsolutions.ca or at 833.339.2327.