Planning for retirement can take many forms, from building savings in an IRA to taking advantage of employer-sponsored benefits like 401(k) matches. 

One option that often flies under the radar is the group annuity contract. Designed for employers to purchase on behalf of their workforce, these contracts can provide covered employees with a reliable stream of income once they retire. Unlike individual annuities, which are bought and customized by a single person, group annuity retirement plans cover multiple employees under a single agreement, offering guaranteed income across the group.

This guide explains what these contracts entail, their pros and cons, and the different types available. 

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What is a group annuity contract?

A group annuity contract is a single agreement between an employer and an insurance company that provides lifetime income benefits for a group of employees. Most often used in employer-sponsored retirement plans, these contracts can give workers a steady income stream once they retire. 

Under this arrangement, the employer acts as the contract holder, while employees are beneficiaries who may receive income according to the terms of the plan. Group annuity contracts can also help employers manage pension obligations through pension risk transfers, shifting long-term financial liabilities to the insurer. This means retirees can rely on their benefits, even if the employer’s financial situation changes. 

For businesses, group annuity contracts can offer predictable, fixed contributions without the ongoing burden of managing pension risks. For employees, they can provide protection against the risk of outliving savings. 

Pros and cons of group annuity contracts

Like any retirement product, group annuity contracts come with both advantages and drawbacks. Here’s a breakdown.

Pros

• Guaranteed income: Group annuity contracts can provide retirees with a predictable stream of income, often for life. This stability helps reduce uncertainty and supports long-term financial security.
• Administrative simplicity: Employers manage a single group contract rather than multiple individual plans, which can lower administrative costs and help streamline plan management.  
• Pooled pricing: Because insurers issue contracts for a group rather than an individual, employers often secure more favorable pricing and terms. These efficiencies can result in lower fees and potentially better returns for employees. 

Cons

• Limited customization: Employees typically have little control over contract terms, investment options, or payout structures, as these are set at the group level. 
• Portability challenges: If an employee leaves the company before retirement, transferring benefits to another plan may be difficult. In some cases, this can lead to reduced benefits or additional fees. 
• Plan-level changes: Because the employer owns the contract, modifications to the company’s retirement plan can affect employees’ benefits. 

Group annuity vs. individual annuity

While both group and individual annuities are designed to provide retirement income, the way they’re structured differs significantly. Understanding these distinctions can help you decide which option better aligns with your needs. Here are the factors to consider.

Cost

Group annuities generally have lower costs because administrative and investment fees are spread across many participants. With individual annuities, you bear all associated fees yourself, which can make them more expensive overall. 

Flexibility

Individual annuities allow you to customize terms, investment options, and payout structures to suit your personal goals. Group annuities, on the other hand, follow a standardized, one-size-fits-all design, with limited room for individual tailoring. 

Portability

Individual annuities can stay with you regardless of where you work, while group annuities are typically tied to one employer. This means if you leave the company, you may lose access to certain benefits or face restrictions on transferring value. 

Risk sharing

Group annuities pool risk across participants, which can reduce individual exposure and contribute to more stable incomes. With an individual annuity, you are typically the sole annuitant and shoulder the full risk, which may lead to more variable results. 

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Group deferred annuities vs. group variable annuities

Group annuity contracts can take different forms depending on how contributions are invested and benefits are calculated. Here are two common structures and how they differ:

• Group deferred annuities: These contracts feature an accumulation phase where contributions from employees, employers, or both grow tax-deferred at a fixed interest rate. Once retirement begins, the payout phase provides regular annuity payments based on the contract’s terms. The primary appeal is stability: A fixed rate ensures predictable growth and protection from market volatility.
• Group variable annuities: Variable group annuities introduce more market exposure, and therefore more risk, in exchange for greater growth potential. Contributions are invested in subaccounts that may be tied to stocks, bonds, or other market assets, similar to mutual funds. The value of the annuity typically fluctuates with market performance, which means there’s no guaranteed rate. Employees may have some input in choosing which subaccounts to invest in, depending on the employer and contract terms.

Explore your annuity options with Gainbridge

Annuities can offer steady income and long-term security in retirement. Gainbridge’s digital-first platform offers tailored annuity products designed to fit your needs and goals. With no hidden fees or commissions, you can enjoy transparency and clarity at every stage of the retirement journey.

Explore Gainbridge today to learn more about the options available. 

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

Withdrawals of taxable amounts are subject to ordinary income tax and if made before age 59½, may be subject to a 10% federal income tax penalty. Distributions of taxable amounts from a nonqualified annuity may also be subject to an additional 3.8% federal tax on net investment income.