What Is a Group Annuity Contract?
A group annuity contract is an agreement between a plan sponsor and an insurance carrier that provides insured retirement benefits for a defined group of participants. Depending on the structure, the carrier may assume responsibility for some or all of the benefits covered by the contract.
For plan sponsors, group annuities can be used to transfer pension risk, support a defined benefit plan termination or provide other insured retirement solutions. For participants, the objective is continuity of the retirement income or benefits they were promised.
How a Group Annuity Contract Works
Before a contract is placed, the plan sponsor and its advisors review the participant population, benefit obligations, plan data and funding position. Qualified insurance carriers are then invited to evaluate the opportunity and provide pricing and contract terms.
Once a carrier is selected and the transaction is completed, the insurer assumes responsibility for the benefits included in the contract. The exact obligations transferred depend on the transaction structure and the participant group covered.
A typical process may include:
- Reviewing plan documents, participant data and benefit calculations
- Evaluating the plan’s funding position and transaction readiness
- Preparing the opportunity for the insurance carrier market
- Soliciting and comparing bids from qualified carriers
- Reviewing financial strength, pricing, administration and contract terms
- Selecting the carrier and completing the placement
- Coordinating participant communication and implementation
The Difference Between a Full Plan Termination and a Partial Risk Transfer
Not every group annuity placement involves shutting down the entire pension plan.
Full Defined Benefit Plan Termination
In a full plan termination, the sponsor settles the plan’s remaining obligations. Depending on the plan, this may involve lump-sum payments, a terminal group annuity contract or a combination of both. Once the required steps are completed, the plan can formally shut down.
Partial Pension Risk Transfer
A plan sponsor may also transfer liabilities for a defined participant group while keeping the broader plan in place. Common examples include retirees already receiving payments or terminated vested participants.
A partial transaction can reduce plan size and exposure while allowing the sponsor to continue managing the remaining obligations.
What Risks Can Be Transferred?
For the benefits covered by the contract, the insurer generally assumes responsibility for investment performance, longevity experience and future benefit payments in accordance with the contract terms.
This can help the plan sponsor:
- Reduce pension liability and balance sheet volatility
- Limit exposure to future investment and longevity risk
- Reduce administrative complexity and ongoing plan expenses
- Create greater predictability around long-term pension obligations
- Protect participant benefits through an insured arrangement
The scope of the transfer depends on the contract and the participants included. Plan sponsors should carefully review which obligations remain with the organization after the transaction.
How Group Annuity Contracts Protect Participants
Participant protection is central to the process. The selected carrier must be able to administer the benefits accurately and provide reliable service after the transition.
Of importance to evaluate:
- The carrier’s financial strength and claims-paying ability
- Its experience administering similar benefit structures
- Participant service capabilities and communication resources
- The accuracy of the data and benefit specifications included in the contract
- How beneficiaries, payment changes and participant questions will be handled
Carrier selection should not be based on premium alone. Financial strength, administration, contract terms and participant support all matter.
Other Uses for Group Annuity Solutions
Group annuity products can support several types of insured retirement and benefit obligations.
Defined Contribution Plans and Guaranteed Income
Employers may use insured income solutions to give participants an option to convert a portion of defined contribution savings into predictable retirement income. These arrangements differ from traditional pension risk transfer and require their own evaluation of plan design, participant needs and available products.
Non-Qualified Executive Benefit Plans
Group annuity contracts may also support certain non-qualified executive benefit programs. The right approach depends on the program and the employer’s objectives.
Retiree Medical and Other Post-Employment Benefits
In some situations, insured institutional solutions may also support retiree medical or other post-employment benefit programs. These programs are different from traditional pension annuity placements and require specialized planning.
What Plan Sponsors Should Evaluate
Before moving forward, plan sponsors should ask:
- Which participant liabilities are we considering transferring?
- Is the plan data complete and are benefit calculations accurate?
- Is the plan sufficiently funded for the proposed transaction?
- Which carriers are appropriate for the participant population and benefit structure?
- How will pricing, financial strength, administration and contract terms be compared?
- What obligations will remain with the sponsor after placement?
- How will participants be informed and supported?
- Who will coordinate the process across the plan’s actuary, recordkeeper and other service providers?
The Role of an Independent Advisory Partner
A group annuity placement brings together plan data, benefit calculations, insurance carrier underwriting, pricing and implementation. An experienced independent advisor can help the plan sponsor coordinate those moving parts and evaluate the carrier market objectively.
The advisor’s role may include preparing the plan for market, managing the competitive bid process, comparing carrier proposals and supporting implementation through contract execution and participant transition.
Why DIETRICH
DIETRICH has spent more than 40 years helping plan sponsors evaluate and place group annuity contracts. As an independent advisory firm, DIETRICH works across the insurance carrier market to help clients understand their options, create a competitive process and secure insured solutions designed around the plan and its participants.
DIETRICH has placed more than 3,000 single premium group annuity contracts, secured almost $30 billion in guaranteed benefits and supported close to 800,000 plan participants.
To learn more about group annuity products, pension risk transfer or defined benefit plan termination, connect with DIETRICH to speak with a retirement plan expert.