At Grand Wealth Management, we often come upon investors who have purchased variable annuities as part of their investment portfolio. Among the first issues we raise with such investors is this: Are you paying too much in annuity fees, and if so, should you consider switching to a lower-cost annuity?
Many investors are drawn to variable annuities based on the promise of tax-deferred growth and future income. Variable annuities are, in fact, popular investment vehicles, especially for people who are saving for retirement and have maxed out on tax-deferred contributions to a 401(k) or similar plan or IRA.
Historically, however, variable annuities have been known to charge hefty fees, which can seriously erode the value of, and return on, a person’s investment. The fees come in the form of insurance costs, administrative fees, sub-account fees, surrender charges, and other expenses. The average variable annuity has an annual cost equal to 2.34 percent of account value, although for some annuities, the annual cost can go as high as 15 percent. Compare these figures to the average annual mutual fund cost of 1.42 percent.
Enter a new, low-cost species of variable annuity, available mostly through no-load mutual fund firms and discount brokers. Many of the new products are proving competitive, at least in terms of cost, with mutual funds.
We encourage each variable-annuity investor to review the details of his or her annuity contract. The annual savings afforded by switching from a high-cost annuity to one of the newer models can be significant.
If you do own a higher-cost annuity, you should consider a tax-free transfer (called a “1035 exchange”) to a low-cost annuity, provided you will not incur surrender charges upon doing so.
At Grand Wealth Management, we help our clients further explore the new low-cost variable annuities so that they can make informed decisions about making them part of their investment portfolio.