We all know that annuities can be a good investment for the right investor, but one of the thing that separates them from other investments is that annuity fees can be particularly high in comparison, depending on the annuity companies and types of annuities you invest in.
One of the more common annuity fees is the Mortality and Expense (M&E) fee. An M&E charge is a mix of expenses ranging from insurance to administrative fees that are applied to the annuities (particularly variable annuities). According to the National Association for Variable Annuities (NAVA) the average M&E fee is around 1.15% or 115 basis points.
Another common expense associated with annuities is the surrender fee. In simplest terms a surrender fee is an amount of money that you have to pay for cashing in your annuity before a set period of time. Typically the fee decreases over time until it eventually fades out to nothing. Generally a surrender fee between 6-7% is very common, and may decrease by around 1% each year. The reason for this fee is that the annuity companies are making money on the investment that you paid in and when you cash in early the company loses the ability to invest that money elsewhere. They make back some of this investment by charging a surrender fee.
With variable annuities, investment expense fees are quite common considering that they are tied in to stocks, bonds or money market funds. When you buy and/or sell these investment securities you will usually be charged an investment expense fee for these transactions, very much like you would with a mutual fund. Investment expense fees are much less common in the guaranteed annuity but there are some annuity companies that still charge it.
Administrative and Management Fees are common across all types of annuities and are charged by the annuity companies themselves for the administration and management of your annuities. These fees could be in the 0.82% range based on a NAVA report. Depending on what your other investment options you may be paying more for your annuities than you would with another investment option.
Overall annuity fees are something that you need to keep an eye on and you need to factor in when you are considering returns. Not all companies charge the same fees so shopping around is definitely a must here, and be sure you fully understand the terms and read the fine print before investing.