It’s not that there’s anything wrong with an investor paying fees for certain investments in their portfolio, but when it comes to annuities the key is ‘transparency,’ notes the WSJ’s article on getting to the bottom of hidden annuity fees.
What are some of the fees carried by a popular annuity choice among investors, namely the variable annuity? In the case cited by the WSJ, an annuity holder was paying the following:
* Administrative expenses: 1.4%
* Special rider to ‘lock in returns:’ 1.1%
* Mortality expense fee, wrap fee and adviser fee: 5.8%
* Surrender fees vary
The grand total of 8.3% in fees, in this case, turned out to be higher than the annual return on the annuity, plus a surrender fee of $10,000 to get out of their annuity contract.
Annuities and the 403(b) retirement portfolio.
Generally, for non-profit organizations, or public education entities, employees are usually enrolled in a 403(b), which is their tax-advantaged retirement account. Like a 401(k), employee contributions are channeled to the fund via salary deferrals to help the account continue to grow tax-deferred; and, when it’s withdrawn, that’s when the income is taxed. Where do insurance products like a variable annuity fit into a 403(b)? In short, it doesn’t, according to Neal Frankle, a financial writer on Money/US News.
“To add insult to injury, many plans offer fixed or variable annuities, which adds even greater expense to the mix. It makes absolutely no sense to buy an annuity inside a retirement account, and I can’t understand why any plan would have such provisions, but they often do.”
A traditional IRA, or Roth IRA, are reasonable alternatives to consider, Frankle notes. There is no point in putting an annuity in any retirement account, because of the extreme fees you pay along the way.
Annuities may have their place and serve a purpose, but if you are looking for long term growth in your retirement account without fees cutting into gains, look for a low fee retirement plan that is well diversified.
By Financial Social Media and Jimmy Hancock