One of the things I like about the new(ish) BusinessWeek magazine is the way they summarize their articles using what they call The Bottom Line. In the most recent issue, an article titled "Income for Life? Sure, but What Does It Cost?" was bottom lined thusly: "While lifetime income guarantees on variable annuities offer protection against investment losses, they are complicated and expensive."
The article highlights the fact that the annuity industry is booming on the heels of the 2008 meltdown, as near-retirees and other skiddish investors seek a place for safe returns. The way it works in this case is that variable annuity products offer a feature that ensures a baseline level of income for life, once the purchaser decides to annuitize his or her investment in the product. Based on data from Morningstar, the article pegs the average fee for the guaranteed income feature at 1.03%, which comes atop the regular annuity fees of 2.51%. That's a 3.54% hurdle to overcome when seeking returns on your money through these vehicles. This helps to ensure that the "upside potential is fairly limited".
Also highlighted is the fact that these contracts come "with so many conditions and limitations that it's difficult for consumers to understand them, and terms vary by insurer". In my mind, this is a far bigger issue. If a consumer chooses to pay 3.5% for a guaranteed benefit with limited upside, and that consumer knows that it costs 3.5% per year, an informed decision has been made. However, not once do I remember a client coming into my office with an annuity knowing what the fees are. Never. Furthermore, I'm actively working with four clients right now to explore options for variable annuities that they now suspect are not a good deal for them. Unfortunately, these contracts typically lock you in to these high fees for a long period of time, so the options are sometimes very limited. Certainly, we'd all be better served by a more transparent model.