What is the purpose of offset plans in retirement benefits?

Offset plans in retirement benefits serve the purpose of integrating the retirement benefits with other income sources, primarily Social Security. The correct answer indicates that the benefit provided by the offset plan is calculated first and then reduced by the expected Social Security benefits that the employee will receive upon retirement. This mechanism is intended to ensure that the total retirement income (from the pension and Social Security) aligns with a pre-established target income level.

By reducing the pension benefit by the expected Social Security amount, the plan effectively coordinates the retirement income sources. This helps manage the overall financial obligations of the plan sponsor while still providing a benefit that supports the retiree's income needs in retirement. The structure allows for a predictable outcome for both the employer and employee regarding future retirement income.

In contrast, the other choices do not accurately represent the purpose of offset plans. For instance, calculating the benefit based solely on employee contributions does not encompass the integration aspect of offset plans. Similarly, a benefit that is not subject to any reductions would not align with the primary purpose of offsetting expected Social Security payments. Lastly, automatic adjustments for inflation typically relate to cost-of-living adjustments, which are not a defining feature of offset plans.