Should Annuities Be Part of Your Retirement Plan? Part 2

Part two of a three-part series on annuities. Managing partner and CERTIFIED FINANCIAL PLANNER™ Allen Stocker breaks down the variable annuity — how it differs from a fixed contract, the surrender charges and layered fees to watch for, and why some clients end up paying nearly what a Treasury bond would yield.

Video transcript

Hi, my name is Allen Stocker, certified financial planner and managing partner here at Patriot Asset Advisors. We’re doing a series on annuities and whether they should be part of your retirement plan. One of the types out there is the variable annuity contract. So what’s different about the variable contract versus a fixed interest rate? With a variable contract, the investor takes all of the risk, using what the industry calls sub-accounts — and these sub-accounts basically mirror a mutual fund.

A couple of things to be cognizant of: a variable annuity can be a four-year contract, a seven-year contract, or even longer. Those periods are when the insurance company applies a contingent deferred sales charge (CDSC). If you had a seven-year contract and took money out before it reached full conclusion, you’d be assessed that CDSC charge — anywhere from one or two percentage points up to 9 or 10%. You want to be aware of that before making any withdrawals, and honestly before even entering the contract.

There are also other fees beyond the CDSC. Variable annuity contracts carry a mortality and expense charge, generally around 1.3 to 1.4%. There are also costs for the sub-account, or mutual-fund-type arrangement, which can range from very low to well over 1% for the investment itself. In addition, there are usually riders offered, and those have significant costs. If we go back to the great recession in 2008, insurance companies had a good bit of trouble — think of Lincoln Financial or AIG, big carriers at the time. Those companies were under such financial stress that they went back and redid these contracts, significantly increasing the cost of the riders. We’ve seen clients come in with variable annuity contracts that have annual costs of 3.5 to 3.7%, sometimes even higher.

For me, it’s rather hard to suggest that a client keep those contracts and carry that financial burden when the cost of the contract is nearly what a 10-year Treasury bond would pay. If you have further questions, please feel free to reach out to us at Patriot Asset Advisors — we’re well-versed in annuity contracts and can help steer you in the right direction.