It’s a common misconception that truly comes from an uneducated place. You’ll often hear, “annuities would be fine if not for the hidden fees.” In almost every case that is nothing more than a scare tactic because all but one annuity that I’ve seen has the fees clearly disclosed up front. There is a reason why fees are valuable and a reason why fees don’t exist on a lot of products. You need to understand both.
Ken Fisher does a really good job of warning people about annuity fees. So much so that many people disregard annuities altogether because of the perception that what he writes pertains to all annuities. That is not the case. Many are surprised to hear that I actually agree with most of what he says. I do, however, think his writing is misleading because he never says that he is speaking specifically about variable annuities. So what he writes doesn’t apply to the majority of products available.
For purposes of this article I’m going to reference fixed and variable annuities. I’ll use the term ‘fixed’ to generally apply to both fixed rate products and fixed indexed products. Both have the same foundation so that’s where you need to focus.
Fixed annuities don’t have fees. Before anything else is added, every basic fixed contract is a spread product. It means an insurance company invests your money, earns yield and subtracts a portion for expenses and profits. What’s left is the yield stated in the contract. You don’t buy a higher rate minus a fee, you get the advertised rate and the insurance company took their piece before you even came into the picture. Anyone who complains about this should look into just how much money a bank makes when you buy a CD.
Fees only come into play when you add something to the base contract. Some people want an income guarantee, additional death benefit or some kind of long-term care payment. If you want the additional benefit you will have to pay a fee. If you don’t want to pay the fee then don’t take the benefit. Fees are a choice in fixed annuities.
Variable annuities have fees for many similar reasons, only to add benefits you may or may not want. Again, the base contract has no fees but the costs go up when you add mutual fund expenses and any insurance you want on the account value, future income payments or even a protected death benefit. Total costs can approach 4% only because insuring all those things against market risk is very expensive. The blend of risk and insurance inside a variable annuity makes for a complicated list of considerations so if you don’t want the benefit, don’t pay the fee.
In most cases, the difference between fees for Ken Fisher’s management and a variable annuity only come down to the cost of a guarantee. Go ahead and ask him how much he would charge to guarantee what he says, and he might pull down that one-sided report of his.
I don’t sell variable annuities, not only because high fees create sticker shock but also because I’ve found you can do better with the right mix of a fixed annuity and market securities. On one side you have the protection you need while on the other you get the upside growth you want. This combination can reduce fees to near-zero, depending on how you invest in market securities. If you want to see how much this saves you over time then check out my newsletter from last year: How Fees Affect Investment Performance.
Fees always cost something in the end. Aside from the out-of-pocket cost there is always an unrealized cost, which is often much bigger. I suggest you avoid fees if at all possible. Knowing how to do that requires you to understand why fees exist and how you can avoid them if you don’t want the benefits provided. Like everything else this is very simple and it’s best to avoid the hysteria if your goal is to find the best solution.
I have sold some contracts with fees to those who wanted an additional guarantee. But, 90% of the contracts I’ve place with customers have no fees whatsoever. I wouldn’t mind a few comments from current contract owners who can confirm my claim, for the benefit of any pessimists in the crowd.
Enjoy your weekend…