Variable Annuity Fees

Through no fault of their own, many Long Island teachers have 403(b) plans that are invested in variable annuity contracts.  Most school districts allow sales reps from insurance companies to come into faculty lunchrooms to discuss how teachers can supplement their pensions with a 403(b) plan.  The problem is these sales reps are not financial advisors but instead salespeople motivated to sell products that earn them the highest commissions regardless of whether it is beneficial to teachers.  This part of the arrangement is not often discussed, and unfortunately, a contract is signed and teachers walk away believing they have a great plan to help them in their retirement.  But the opposite is true.  Let’s look at why.

It is simple:  variable annuities have high fees. Unfortunately, most teachers discover this too late resulting in hundreds of thousands of dollars in lost savings.

Since variable annuities have additional fees for added features as opposed to just purchasing mutual funds, every penny spent on these features is a penny taken away from your investment returns.

Variable Annuities typically charge you in 3 ways: ¹ 

1. Administrative Fees:       Approximately .26% of your account value or a flat fee of $25-$30 a year

• Administrative Fee is to cover the cost of mailings and ongoing service.

2. Expense Ratio:                   Approximately .75% of your account value

• Expense Ratio is the investment management fee for the underlying stock and bond investment choices.

3. M&E Fees:                          Approximately 1.20 % of your account value

• The M&E stands for Mortality and Expenses. It is a fee charged by the insurance company to provide you with a death benefit. If your average account value during the year is $100,000, you will pay $1,400 in M&E fees just for that year.  This is the fee that can eat away at your hard-earned money.

You don’t see the cost of these 3 expenses because they are often not transparent and are automatically taken right out of your account value.

In our next article, we will discuss in more detail how the M&E (the death benefit fee) of variable annuities can be damaging to your investment.

If you are interested in speaking with John Carbonara to review your present 403(b) plan, you can book an appointment below using his online calendar.  This is a complimentary service to educate and increase awareness.  We look forward to hearing from you.

1. Source: sec.gov

• Continue to our next article Variable Annuity Mortality & Expense Fee.
• The complete series:
  • 1) Intro to 403(b) Plans
  • 2) Variable Annuity Contracts
  • 3) Variable Annuity Fees
  • 4) Variable Annuity Death Benefit (M&E Fee)
  • 5) 403(b) Custodial Account - Mutual Funds
  • 6) 403(b) Transfers (How We Can Help) 

Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer. Withdrawals made prior to age 59½ are subject to a 10 percent IRS penalty tax, and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available subaccount portfolios will fluctuate, so the value of an investor’s unit, when redeemed, may be worth more or less than the original value. Optional features available may involve additional fees. When considering using variable life insurance policies for supplemental retirement income, it’s important to note that underperformance of the policy’s subaccounts may require increased premium payments to prevent a policy lapse. In the event of a policy lapse or termination, outstanding loans will be deemed a taxable payment to you as the investor. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.