Benefits are simply equal to a percentage of pay. A disadvantage of pension equity plans is that there is no nondiscrimination safe harbor. As in a DB plan, the contribution required to fund this benefit on a level basis to retirement age is actuarially determined. At this point what has appeared to be a DB plan becomes a DC plan. Individual accounts are established to which the employer contributes the determined contribution annually.
Investments are generally participant-directed.
Ultimate retirement benefits will depend upon the accumulated account balance and may be larger or smaller than the targeted level. Of all the DC hybrid plans, the target benefit plan comes closest to imitating a DB plan. Employer contribution is fixed. Benefit delivery resembles that of a DB plan with older participants receiving higher contributions and younger participants receiving smaller contributions. Thus, it is a useful design for employers that need to attract and retain mid-career, highly compensated employees.