A target benefit plan is a type of pension plan that contains features of a defined contribution plan but is made to appear like a defined benefit plan.

It is similar to defined benefit plan in that the annual contribution is determined by a formula to calculate the amount needed each year to accumulate (at an assumed interest rate

Interest

Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

) a fund sufficient to pay a projected retirement benefit, the target benefit, to each participant upon reaching retirement

Retirement

Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...

. It is similar to a defined contribution plan in that the plan does not guarantee any benefit will be paid. The plan's only obligation is to pay whatever benefit can be provided by the amount in the contributor’s account. The actual earnings on the individual accounts may differ from the estimated earnings used in the assumptions and the investment performance of that account through the years.