Although many annuities can nickel-and-dime investors with layered fees, variable annuity fees tend to be an especially pricey bunch. Unfortunately, many investors don’t fully understand all the fees associated with variable annuities.
Don’t go in blind. Consider all the fees first—compare variable annuity costs with other investment costs before making your choice. Variable annuities might not deliver everything they promise because they are generally weighed down by complex fee structures that dig into your wallet.
Variable annuity fees are often so complex, it can take a salesperson several attempts to explain. In the following, we hope to help you identify and understand some of the most common fees associated with them. Also, you should consider the cost of any added features, or “riders”, that you might be offered. These riders intend to make the annuity even more beneficial, but often extract even more fees that may eat away at potential returns.
Here are some of the most common fees associated with variable annuities:
Along with the typical annuity charges, many insurers offer investors the option to purchase additional features, called riders, with their variable annuities (and other annuity types). Riders can be very popular due to their advertised benefits, but usually come with additional fees. These added variable annuity fees can eat into annuity returns, so be careful to weigh the potential benefits riders provide relative to their costs.
Annuity riders generally fall into one of two categories:
As you might expect, these correspond to whether the protection goes into effect during your lifetime or after you pass away.
Another important note: Individual annuity providers may call these riders different names or define them differently. Above all, remember that you may only truly know what’s offered by thoroughly reading an annuity’s contract and any associated riders’ contracts. These contracts can be long and full of legalese, but don’t let that deter you. Not reading carefully means you could be stuck with less than beneficial results for a long time. Annuities can be difficult to get out of without a financial penalty. Riders add another layer to the standard variable annuity fees and the fees of most other types of annuities.
Some common variable annuity riders for living benefits include:
Common riders for death benefits include:
For most death benefits, there comes an age (usually around age 85) at which the annuity contract requires you to annuitize. Remember, after annuitization, you lose any death benefits.
In addition to basic fees, the fees from riders can quickly pile up if you choose to add them to your plan, and they can weigh even further on your returns.
Because of all the fees, the performance of a variable annuity’s underlying investments may lag behind similar direct investments, even over a relatively short time period of around 10 years. Consider the fees of an average variable annuity with one common rider:
In the above example, the hypothetical variable annuity fees with one rider could amount to 3.44% annually! Imagine the potential effect on a $100,000 initial investment assuming a 0% rate of return and fees and expenses based on a one-year period. An investor who placed his or her money in this variable annuity and its riders would owe fees of around $3,440 in the first year, compared with just $630 for the same $100,000 invested in a mutual fund (using the 0.63% average annual mutual fund fee mentioned above). That’s a difference of about $2,810.
To provide some context, Let’s say you decided not to buy the variable annuity and instead invested that extra savings every year. If you continued to invest the same savings every year—even with a conservative average return of 3%—you might end up saving tens of thousands of dollars after a decade. That is money you would forgo with the variable annuity, because that cash would have instead been paid in fees. For many retirees, those savings could represent a full year of living expenses, and it certainly isn’t an amount that anyone would want disappearing into the pockets of an annuity custodian.
The chance of forgoing such potential growth in just 10 years shows how significant the cost of variable annuity fees could be. That is why we believe you need to carefully consider what you are getting into with a variable annuity, and read any materials associated with the investment with a detailed eye on the small print.
If you have questions about variable annuity fees, or would like a second opinion on an annuity, request an appointment with us now. Fisher Investments has Annuity Counselors to help you understand annuities and their potential short-comings.
1Insured Retirement Institute, 2016 IRI Fact Book (Washington, DC: IRI, 2016), 114.
2Investment Company Institute, 2017 ICI Fact Book, https://www.ici.org/pdf/2017_factbook.pdf, 89.
3Insured Retirement Institute, 2016 IRI Fact Book (Washington, DC: IRI, 2016), 102.