How One Woman Paid Over $3,500 in Variable Annuity Fees and Didn’t Even Know It

Joseph Meyer
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The Details

Variable annuities can be an excellent way to increase your retirement savings while minimizing your tax bill. However, they do come with minimum required distributions, which can be frustrating or even a hardship for retirees with small balances.

Variable annuity fees can include a variety of fees for different services that are often overlooked. The fees will vary based on the company offering the annuity or the advisor selling you these fees. The best way to know what you are buying into is to read the fine print on all fees and request a prospectus. To save you time and headache, here is a summary of some of the most common fees you should watch out for:

Annuity acquisition fees (front-end loads): These fees are charged upon the initial purchase of the annuity. They vary based on the size of the annuity and are typically around 7%-8.5% on the initial investment.

Sales charge (back-end loads): This is a percentage of the annuity that is deducted from the management fees and earnings, designed to pay the dealer for their services.

Surrender charges: A surrender charge can be up to 7% and is deducted if you are not able to maintain the surrender level.

Minimum acquisition fees: An annual fee that is deducted from your account. It is typically waived if certain account value and minimum value conditions are met.

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Annuity X-Ray

Variable annuities are a type of investment, in which investors deposit money into an account that is then invested in a largely mutual fund portfolio. Variable annuities also come with a death benefit. The insurance company guarantees to return the funds in the account if an investor’s heirs become the beneficiary.

Variable annuities are generally sold through insurance agents, which can create a conflict of interest. The variable annuity salesperson may earn a larger commission for selling an annuity to the agent’s customer than the salesperson would if the customer bought a mutual fund.

Variable annuities act like an insurance product, and there are costs associated with the insurance features of variable annuities. Over the years, a number of variable annuity fees have come to light. As you might expect, some of the fees can be very steep.

The total amount of fees paid by an investor can be substantial and can make a variable annuity a bad deal for the investor. Some of these fees can be hidden and buried in the fine print, and can only be revealed during the purchase of the variable annuity.

How Much Are You Paying in Variable Annuity Fees?

It seems that variable annuity fees are often overlooked by investors. Now, if you’re not familiar with what variable annuity fees are, I’ll spell it out for you. Fees are essentially fees the insurance company charges you to own and manage your variable annuity (it’s a contract that holds a collection of mutual funds that you can buy your variable annuity through). These fees are usually charged in a percentage of the money being managed and are part of the contract you sign with your insurance company.

The next important step we took was to see how many plan participants are in each plan. We discovered that, on average, plan participants contribute only 4%, yet get a 79% tax advantage when they max out (6). This is where the fees kick in. In other words, you’re paying for the tax advantage and not getting much of the tax advantage.

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