Group Variable Annuity Contract sounds like a complex term, but the reality is much simpler and certainly not something to avoid when a business is considering a 401(k) plan provider. There are a number of misconceptions attached to this term and annuities in general. One misconception is that merely because a plan is held in a group variable annuity contract it is more expensive than plans through other financial institutions. Other misconceptions are that group variable annuity contracts:
- carry additional charges;
- are complicated; and
- compel participants to purchase an annuity upon distribution.
Most retirement plans are held either at a mutual fund company or within a group variable annuity contract at a life insurance company. Retirement plan assets are held in a group variable annuity contract because the program administrator is a life insurance company that sells annuities, as opposed to a mutual fund company. The differences between plans held at a mutual fund or a life insurance/annuity company may be virtually indistinguishable.
The investment options available for employees to invest in are held in the group annuity contract. The distinctions between investment options in an annuity contract and a mutual fund arrangement are slight. Mutual fund arrangements allow for employees to make contributions directly to the mutual fund, while investments in these same mutual funds or similar investments are made through a group annuity contract in separate accounts. Participants then hold units in that separate account. The separate account is “separate” from the general assets of the insurance company, so there is no credit risk in the event that the insurer becomes insolvent.
The following can help to clarify misconceptions surrounding group variable annuity contracts.
MISCONCEPTION: Plans offered through Group Variable Annuity Contracts are more expensive.
The idea that 401(k) plans offered through group variable annuity contracts are more expensive than those offered through mutual fund companies is not a rule. Certain expenses typically associated with group variable annuity contracts include sales expenses, mortality risk charges, and withdrawal and transfer charges. It is important to note that not all group variable annuity contracts impose these charges.
New plan and participant fee disclosure requirements make it is easier for employers to compare costs. Employers should review the fee disclosure documents provided by each company offering 401(k) investments and administration to compare the overall costs and the services provided for those costs. The annual participant fee disclosure documents detail investment performance and fees so employees are fully informed about available investment options.
MISCONCEPTION: Participants in plans held in a group annuity contract must take an annuity distribution.
Participants in retirement plans held at life insurance/annuity companies do not have to take their benefit in the form of an annuity. The distribution options available to participants are governed by the plan document and other agreements and, while an annuity may be an available distribution option, it is often not the only distribution option.
MISCONCEPTION: Group variable annuity contracts are complicated.
People sometimes have issues with variable annuity contracts because they may have additional features like death benefit riders and insurance coverage. However, there are group variable annuity contracts that do not have any riders and are for the sole purpose of providing funding options for qualified retirement plans.
Whether a 401(k) plan is held at a mutual fund or life insurance company within a group variable annuity contract, it is designed to provide employees with a means to accumulate tax-deferred money for their retirement. In either case the money stays in the participant’s account until withdrawn as permitted under the plan. Starting early and saving more for retirement should be the goals for any employee in a retirement plan regardless of where it is held.
Funding your retirement plan through a group variable annuity contract is not necessarily more expensive, may not be as complicated as made out to be, and does not compel an annuity distribution. Most importantly, it may be virtually indistinguishable from a 401(k) plan offered by a mutual fund company. Often, small business retirement plan sponsors find funding their plans through a group variable annuity contract not only viable and cost effective, but the preferred choice. In fact, according to the 2012 American Council of Life Insurers Product Fact Book, there was more than $742 billion in qualified plan assets (including IRAs) in group annuity contracts. All of these facts should help dispel the misconceptions commonly held about the term group variable annuity contract.
The Members Retirement Program, which is exclusively endorsed for AIA members and administered by AXA Equitable Life Insurance Company, is a group variable annuity contract which does not impose any of the sales expenses, mortality risk charges, and surrender and transfer charges typically associated with group variable annuity contracts.
To receive information on the Members Retirement Program and other retirement planning solutions offered to AIA members, please call 800-523-1125 or visit us at www.axa-equitable.com/mrp.
The Members Retirement Program (contract form #6059) is funded by a group variable annuity contract issued and distributed by AXA Equitable Life Insurance Company, NY, NY. AXA Equitable does not provide tax or legal advice and is not affiliated with the AIA.
GE 88258a (10/13) (Exp. 10/15)