Annuity fees, explained

Annuity costs depend on the type. A variable annuity usually shows its fees as a list of annual charges that stack up; a fixed or indexed annuity usually shows none, because the insurer's cost is built into the interest rate, cap or spread it offers. Because fees are layered and sometimes hidden in the crediting formula, the best habit is to ask for a written list of every charge and add them up.

Fees in a variable annuity

FINRA says annuities are complex and can be costly, and lists surrender charges, mortality and expense risk charges, administrative fees, special-feature and rider charges and commissions among the costs; it also reports that variable annuities are a leading source of investor complaints, in its annuities overview. The usual layers:

The exact numbers are in the prospectus and contract. Under SEC Rule 498A, variable annuity issuers may provide a short summary prospectus, which makes the fee table easier to find.

Rider fees can be larger than they look

Rider charges are often a percentage of the benefit base, a notional number that can be higher than your account value. A fee of 1% of a benefit base that has grown to be 30% above the account value is a bigger percentage of what you actually hold. The rider fee is also typically charged every year whether or not you use the benefit. See guaranteed lifetime withdrawal benefit riders.

Fees in fixed and indexed annuities

fixed annuities: how they work, what they cost, who they suit and MYGAs generally have no explicit annual fee. The insurer earns a spread between what its investments earn and the rate it credits you, and the commission is built in. You see cost indirectly, in the rate and the surrender schedule.

fixed indexed annuities: caps, participation rates and trade-offs add another layer. The insurer limits how much of an index's gain you receive through a cap rate, a participation rate or a spread, and these can be changed annually unless the contract guarantees them. A rider on an indexed annuity may carry an explicit annual fee. RILAs cap gains too and shift part of the loss risk to you through a buffer or floor, and some carry fees on top.

Single premium immediate annuities have no ongoing fee at all; costs are built into the payout. Compare quotes with the annuity payout calculator.

Commissions

Most annuities are sold by agents or advisors paid by the insurer, so the commission is part of the contract's cost, even when you write no separate check. Advisor-fee-based and "no-commission" annuities exist, and they typically charge an ongoing advisory fee instead. Under the best-interest standards covered in best interest rules for annuity sales, sellers should disclose compensation on request. Asking is a reasonable step: "How are you paid on this product, and does it change if I choose a different one?"

A worked cost example

Say a hypothetical variable annuity has an M&E and administrative total of 1.4%, average fund expenses of 0.7% and a lifetime-benefit rider of 1.0%. Together that is 3.1% a year. On a hypothetical $200,000 account that is about $6,200 in a year, before any surrender charge. The figures are illustrative, not market prices. If the investments earn 6% before costs, the account net return is about 2.9%. Whether the guarantees justify that drag depends on how likely you are to use them.

Ways to keep costs down

• Choose the simplest contract that does the job. If you want guaranteed lifetime income and nothing else, an income annuity or a deferred income annuity carries no layered fees.
• Skip riders you will not use. An enhanced death benefit rarely helps a buyer whose beneficiaries are already covered by other assets.
• Look at share classes. Some variable annuities are offered in different classes with different surrender schedules and M&E levels, trading a lower ongoing charge for a longer commitment, or the reverse.
• Use low-cost subaccounts. Fund expenses are one of the few layers you can choose directly. Index-based subaccounts usually cost less than actively managed ones.
• Watch for fees on small balances. Some contracts charge a flat annual fee that matters more on a modest account.
• Compare net, not gross. Ask for an illustration that shows the account value after all charges, not just before them.

Costs are not the only measure, since a guarantee that you actually use can be worth its price. See are annuities a good idea? for how to weigh that.

A checklist before you buy

1. Ask for the full fee schedule in writing, including every rider.
2. Ask whether charges are on account value or a benefit base.
3. For fixed or indexed contracts, ask what can change annually: cap, participation rate, spread.
4. Add surrender period and the free-withdrawal rules (annuity surrender charges and free withdrawals).
5. Ask how the person selling the contract is paid.
6. Compare with a low-cost alternative that has no guarantees, so you can see what the guarantees cost.

Key takeaways

• Variable annuity costs stack: M&E, administrative, fund and rider charges, plus surrender charges.
• Fixed and indexed annuities hide cost in the rate, cap or spread rather than in a listed fee.
• Rider fees are often charged on a benefit base and apply every year, used or not.
• Commissions are paid by the insurer but still affect the terms you get.
• Add up all charges and compare with what the guarantee is worth to you.