In what way is a target benefit plan similar to a defined benefit plan?

A target benefit plan is similar to a defined benefit plan in that both utilize formulas based on factors such as the employee's age, salary, and years of service to calculate benefits. This characteristic aligns with traditional defined benefit plans, where an employer promises to provide specific retirement benefits that are calculated through a set formula. This method ensures a structure that considers an employee's earnings and tenure, ultimately guiding how much they will receive upon retirement.

In contrast, while a target benefit plan aims for a target retirement benefit based on a set formula, it does not guarantee that employees will receive those benefits since it can be influenced by the performance of the underlying investments. This distinction highlights the different risk levels involved between target benefit and defined benefit plans. Other choices do not accurately represent the nature of a target benefit plan; they either imply guarantees that are not present or suggest contributions tied to performance, which do not reflect the fundamental similarity to a defined benefit approach.