A group retirement annuity is a financial asset used by employers. Its main benefit is to provide for the retirement years of a company’s employees. A defined-benefit plan is more commonly known as a pension plan. It was a very popular retirement-plan model leading up to the early 2000s. Since then, many employers began to default on their pension liabilities.
Still, group retirement annuities, as a type of pension plan, weren’t (and aren’t) entirely bad. In fact, some companies are still using these plans for their employees. This is why, in this article, we will talk about the benefits to employers and employees of these types of plans.
General Information About Group Retirement Annuity Plans
Group Retirement Annuities are called tax-sheltered annuities under IRS code 403(b) because they allow contributions to be made with pre-tax dollars and for earnings to accumulate tax-free during the accumulation stage. Under these kinds of plans, employees are allowed to contribute a maximum of $19,500 per year to their annuity. Also, they are also allowed to make an extra catch-up contribution each year of $5,500 once older than 50.
Employers like these plans because they make it slightly easier to control costs than with a 401(k) plan). Moreover, employers are allowed to contribute whatever amount they would like to their employees’ plans. This is true so long as their employees qualify.
5 Benefits of Being a Part of a Group Retirement Annuity Plan
Benefit 1: Employers Can Redirect Risk
In the early 2000s, the major problem with most pension plans was that the employer assumed the total risk for making pension payments. The growth of the deposits into these pension funds was not substantial enough to support the company’s retiring population. Therefore, those companies defaulted on their pension obligations. This sullied many major companies’ reputations and left many employees highly disgruntled.
However, a group retirement annuity plan can allow an employer to create a pension-like plan. This strategy allows the company to put the risk on the insurance company. So, the company cannot default on retirement payout obligations.
Benefit 2: Employers Can Discount Their Contributions
Much like with a 401(k) or a SEP account, a business will often make contributions to a group retirement annuity plan on its employees’ behalf. An employer is allowed to subtract the contributions that it makes to its employees’ accounts from the company’s taxable income. This is an effective cost-cutting method. This will reduce the company’s tax burden each year.
While this cost-cutting measure isn’t necessarily a reason that an employer should contribute, it serves as an extra benefit (besides keeping employees happy) for when an employer does choose to contribute.
Benefit 3: Employees Can Reduce Their Taxable Income
It is also important to note at this time that employees who take part in these tax-sheltered annuities (TSAs for short) are able to reduce their taxable income as well each year simply by contributing.
Currently, TSAs do not have a “Roth” option like IRAs or 401(k)s which allow employees to contribute with post-tax dollars. Still, the benefit of reducing taxable income allows an individual to pay less in taxes now and also save for their future. This makes it a great choice for many employees who wouldn’t otherwise contribute to a retirement plan.
Benefit 4: It Takes the Hard Work Out of Investing
Let’s face it: many employees have no idea what they are doing when it comes to investing. As a result, certain individuals may ill-advise them. Another worse situation is that some might be clueless when it comes to making decisions for their traditional 401(k) accounts. Thankfully, the insurance company is the one that chooses the investments for these types of accounts. This entity serves as the administrator for these group retirement annuity accounts
As a result, employees will usually not have to know much about investment types, styles, or other information. The group’s specialists will help them create this kind of account.
Benefit 5: An Employee Can Choose When and How to Receive the Money
Another benefit of these group retirement annuity plans is that each employee can choose when and how they want to be paid out. The group usually does that during what is known as the annuitization phase. It is during this phase that the annuity quits accumulating new value, and the payout of the accumulation thus far begins.
An employee can choose to receive the money in the form of an income over the course of their remaining lifetime. Another option is to receive their retirement money in a lump sum. However, one should consider that any early withdrawals before the age of 59.5 will face a penalty by the IRS of 10%.
Drawing to a Close: Great Benefits and Risks Alike
Of course, with all of the benefits that are available with these kinds of plans, there are a number of risks that are at play as well. For instance, group retirement annuity plans can be difficult to move around. It is not like the 401(k) or IRA plans. These last ones are fairly easy to rollover and/or transfer to a different brokerage firm or company. This means that an employee who decides to change firms could face tax liability problems and other difficulties in making a move.
Furthermore, these types of plans can limit employee decision-making capabilities to some degree. Also, the insurance company that administrates the plan may not always act in the best interest of each employee.
For these reasons, you should seriously weigh the benefits and risks of proceeding with employment by that company before moving forward. This is important especially when you are about to take a job with an employer who does NOT offer the more traditional defined-contribution plan options (i.e. SEP 401(k), IRA, etc.) as part of their benefits package.
As always, you should consult with a financial advisor that you trust before making any long-term decisions. Otherwise, they could adversely impact your financial future or legacy.