What Is a Group Annuity?

A group annuity is a shared retirement or pension plan for which payments are made by one entity, such as an employer, on behalf of a group. They are typically issued by life insurance companies. In order to qualify for a group annuity, its combined members must meet certain tax requirements.

Group annuities consist of the overall fund and underlying units. All employees pay into a single fund, but the units are necessary for later determining retirement payments. Essentially, employees do not invest in specific funds, but they do have a pre-determined piece of the overall investment.

The insurance company responsible for managing a group annuity will typically handle taking payments from participants, investing contributions, and distributing payment to employees once they are retired. Typical group annuity costs include the separate account fee and the administrative or contract charge. The separate account fee covers the charge of managing the investment. Administrative fees include all costs of managing the group that owns the investments, such as commissions for the insurance agent.

Most group annuities have multiple options for payout. Upon retirement, an employee can usually choose to use the funds to purchase a joint life or life annuity or to receive a lump sum. Payment of a group annuity is typically made at a predetermined retirement age. Under certain conditions, it is also possible to receive payment before or after the employee has reached that age. The typical goal of the investment is to provide 40 to 60 percent of the retiree’s income before it is cashed out.

Metropolitan Life Insurance Company in the United States of America (USA) offered the first group annuity in the early 1920s. In the early days of the group annuity, it was often the primary source of income for many retirees. When the USA government passed the Social Security Act of 1935, group annuity sales dropped. Eventually the two benefits served as complementary retirement funds for many retirees.

For several years, group annuities were primarily offered as part of a pension plan. When the pension plan model dropped in popularity, the annuities began to be offered more frequently as a part of an employee retirement contribution plan. With this system, the employee makes regular deposits to a retirement fund, which are typically matched by the employee. Many companies will require that an employee remain with the company for a certain number of years before becoming fully-vested and receiving the matched funds, but there are some organizations which offer those funds without those conditions.