Target Benefit Plans

[Guest LKHartnett]

I am under the impression that new Target Benefit Plan design options may be available in 2002. I'm not clear on the details, but I have been asked to look into it further.

I have done an exhaustive search of familiar benefits sites on the internet to see if I could find anything new, and came up with nothing. (With my lack of fortune in finding anything, I'm wondering if maybe it's simply that EGTRRA has opened new doors).

Is anyone familiar with this?

[Belgarath]

Hello all out there in the pension world! Been busier than a one-legged man in a butt kicking contest this summer, and haven't even had time to read these message boards.

I'm not aware of anything specific to target plans. Perhaps your informant was referring to the general increases in compensation, 415 limits, etc?

[AndyH]

LK, the cross testing rules have changed, and a target plan is really a cross tested plan, but targets are specifically exempted from the new rules under certain conditions.

Exempted are safe harbor plans and non-safe harbor plans which have certain specified deviations. For details, see the final 401(a)(4) regulations issued 6/29/2001.

[Kirk Maldonado]

AndyH:

In your opinion, do those rules significantly enhance the attractiveness of target benefit plans. They were popular many (15 or 20) years ago, but I've not heard of any in many years.

[AndyH]

No, they were pretty much replaced by age weighed and cross tested profit sharing plans over the last 10 years. Pre-EGTRRA there were still some limited situations in which they still worked, for old Doctor, young employee settings, for companies having a problem with the 15% 404 limits, and also for sponsors who had terminated their DB plans and wanted to make employees "whole".

Targets were at least until recently the "textbook" replacement plan, at least that is what ASPA's programs taught.

But post EGTRRA, they are almost extinct. I haven't analyzed it but it may be possible for a small company to save on employee contributions due to the exemption from the gateways. I recall somebody on this board having analyzed that, maybe Tom? I personally have not. But their usefulness is now very limited, and any such small savings is probably offset by the fact that the contribution is mandatory, not discretionary, and the fact that any deferrals to maximize 415 would require a second (401)(k) plan.

[Tom Poje]

Kirk:

At least initially, think of it this way. First year of a target should produce similar results to the first year of an age weighted plan.

and an age weighted plan avoids the gateway minimum because it produces smoothly increasing bands.

so, depending on the ages of your population, does an age weighted produce better numbers than a cross tested?

or put another way, is there more than a 17 year age difference?

(1.o85 ^ 17 = 4)

if you put in 5% for rank and file, then owner gets the 20%.

the most an ee can get is still 40,000, conceivably in a target I guess an individual might get less than this in later years because of the way targets work. Personally, if you are talking about someone making booka-bucks, I am not so sure there is a big advantage to them over an age weighted, but I am sure someone can come up with a case where they might be better.