What is a contributing factor that may affect contributions in a target benefit plan?

In a target benefit plan, contributions are primarily influenced by actuarial assumptions made at the plan's inception. These assumptions are crucial because they estimate factors such as mortality rates, investment returns, and salary growth. These predictions help establish how much needs to be contributed in order to reach the desired benefit level promised to employees upon retirement. If, for example, the assumed rate of return on investments is higher, the plan may require lower contributions, while lower assumptions may necessitate higher contributions to ensure the plan can meet its retirement benefit obligations.

The actuarial assumptions are pivotal as they provide the framework for funding and can significantly impact the overall financial health of the plan, determining not only how much the employer needs to contribute but also how those contributions might change over time based on performance against the assumptions. This dynamic makes them a key factor in overall plan management and effectiveness.