A group annuity 401k is a contract providing a monthly income benefit to members of a group of employees. It works much of the same way as an individual annuity except that it is underwritten on a group basis. Group annuity contracts are one way that life insurance companies provide investments and services to 401k.
The Facts
An insurance company offers a series of pooled investment accounts that are then divided into shares amongst the members in order to be reflected on a daily valued 401k record keeping system. A group annuity 401k plan is usually issued to an employer for the benefit of employees. Each individual member of the group holds a certificate as evidence of their annuities. As a pension or retirement plan, it will provide a monthly income benefit to members of the group. All group annuity contracts also offer the right for plan participants to purchase annuities.
Features
With a group annuity, the participant owns "units" in the underlying pooled investment. Group annuities in general will charge two primary fees: a contract charge and a separate account fee. The contract charge is largely comprised of the insurance agent's commission fees and in general is the cost of operating the group annuity. The separate account fee goes toward the management of the investment and is in addition to the initial expenses of the underlying investment.
Identification
Like all pension and retirement plans, group annuity contracts are subject to state laws and regulations which are designed to protect the consumers. Group annuity insurers are forced to comply with the Employee Retirement Income Security Act, or ERISA. The U.S. Department of Labor will enforce these laws to protect the plan's owners and their beneficiaries. ERISA requires that plan sponsors provide their customers with a plan summary and other financial information either directly or upon the participant's request.
Considerations
Group annuity 401k plans will frequently offer two key incentives; guaranteed minimum death benefits and guaranteed minimum distribution benefits. Guaranteed minimum death benefits promise to pay the owner's beneficiary the participant's contribution to the group annuity, or the value of the benefactor's account, whichever is greater. Guaranteed minimum distribution benefits promise minimum periodic withdrawal rights no matter how the underlying investments perform.
Benefits
There are several benefits to group annuities. Owners of a group annuity are offered a guaranteed lifetime income after retirement, as well as numerous investment alternatives, such as bond funds and equity. In many cases, group annuities will offer what are known as "bundled arrangements" which provide a wide array of administrative plans, from investment management to contract support.
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