Watch Out for Those Annuity Fees

By Bob Moeller, CFP,
WEAC's Member Benefits Manager

March 2001

Financial Planning Seminars
Achieving Financial Independence

Last issue, we dealt with the worst tax sheltered annuities (TSAs). As it turned out, the worst submitted were all fixed annuities. But, several variable annuities were submitted. This issue we will review those and also some things to look out for when considering a variable annuity.

At first, TSAs were only offered by insurance companies. They typically offered mutual fund-type sub-accounts, charged high fees, withdrawal penalties, etc. They claimed the trade-off for high fees was you were protected from loss if you died. You actually were buying life insurance you probably didn’t need. Life insurance salespeople loved these products.

Later, mutual funds were allowed to sell TSAs. As a general rule, they reduced or eliminated many of the fees (if there were no sales commissions), and offered good investment opportunities. A well-chosen no-load or low-load mutual fund family was a very attractive way to directly invest tax-deferred in the stock market.

However, if you invested in a mutual fund with a load – as was almost always the case if you dealt with a broker, financial advisor, etc. – you were again faced with sales charges in the area of 4½% to 5½% of every dollar you invested, or even higher.

Of course, if the mutual fund you picked went up 23% a year, you didn’t much care about the costs. But if the stock markets were more normal, or even went down, then the commissions, fees, withdrawal penalties, etc., began to mean something. Many of you realized this in 2000.

Many members submitted variable annuities in the Worst Annuity Contest, when the only thing wrong with their annuity was that the mutual funds they were investing in went down, or didn’t go up as fast as they thought they would. That is not necessarily the sign of a bad annuity. If your mutual fund goes down 10%, but other similar funds go down 15%, your fund performance is good. Your annuity product itself however, may be good, with low fees, etc., or bad, with high fees, etc.

What you are looking for is a fairly priced product; perhaps some advice; decent investment choices with good long-term past records; and maximum flexibility in terms of choosing funds, deciding how to take your money out, etc. If using an advisor, you want to be sure that person has your interests in mind, and follows up on his/her advice regularly. You want excellent, clear statements of how your account is doing.

Here are the companies entered in the contest. You should review your product to see how it compares. If you wish me to review it, send a copy of your latest statement to me at WEAC, P.O. Box 8003, Madison WI 53708. If you are considering the purchase of an annuity through a life insurance product (I don’t recommend that), ask the questions in the box to the left.

*WEA TSA Trust is not an insurance company. Technically, it acts as a facilitator/agent for the member in setting up group TSAa with actual mutual funds.

Posted March 2001