The costs of a Variable Annuity can be calculated and it is straight forward, compare the return of a mutual fund that is sold directly to investors to the same fund held within a Variable Annuity. Let's say that a fund returns 12% but fund within the Variable Annuity's separate account is 10%, pretty good chance the internal annuity charges including riders are about 2%, the easiest comparisons can be made with Index funds. Not an exact calculation but this gets you close. If you read through the prospectus, it will tell you what the Mortality and Risk Expense charges are (these often were 1.25%), as well as the expenses of the various riders that are offered, and also the expense ratios of the funds in the separate account.On the VA, beyond the policy itself, you’ll be well served to get a copy of the most recent annual statement for the annuity, which should show any explicit fees and the funds in which the VA is invested, and the prospectus, which will show the fund expense charges.Thanks for this!
I am a trustee in which the trust holds assets in a variable annuity. The grantors were sold by the safety of the product. It's been extremely difficult for me to ascertain what the fees being charged for this annuity even are because as mentioned in the video the contract/prospectus is incredibly long. I know the financial advisor managing this (the grantors like him) is receiving 0.9% AUM but he's assured everyone the annuity itself has "no fees" including no surrender fees. I need to set aside what will probably be most of a day trying to make sense of the contract but may make a separate post if I have any questions.
Thank you again Wayne.
You’ll want to start up a new thread if you need to reach out for help in deciphering.
Sadly, the 401(k) plan that I just enrolled in is a Variable Annuity, the dead giveaway is the phrase "Separate Account". I picked a Black Rock Target 2025 fund based upon index funds which should cost about 20 basis points and I got it through the 401(k) for 83 basis points, so there are internal annuity costs of about 60 basis points essentially to pay the insurance company for the costs of administering the plan and also allows a smaller employer to offer such a plan without having to pay administration costs or at least minimize them. A lot of the education 403(b)s are also Variable Annuities and are often called Teacher's annuities.
So you can either read the prospectus and add up the fees or do the rough calculations that I showed above. The rough calculation that I suggest is a way of getting at the hidden or disguised fees that companies will bury. I would do both as you can see the hidden fees if they are there, probably disclosed somewhere but they don't always make it easy to find. One reason the prospectuses run pages and pages. The costs on the Variable Annuities from what I remember are usually pretty straightforward, find them in the prospectus and add them up.
A flaw in my rough calculation method is that the retail version of a fund that can be purchased directly by in investor and the version of the same fund offered in a Variable Annuity subaccount might be somewhat different, in other words the portfolios may not be exactly the same though they will be mostly the same. So it won't be exact but will be a good clue as to what the total charges by the insurance company really are. The insurance company might be able to get a discount on the fees charged by the fund management company compared to a retail mutual fund but from memory I don't remember this being passed on to the Annuity owner, the insurance company probably just pockets the difference. In fact, if I remember correctly, there seems to be an upcharge.
Stinky hinted at this in his presentation as he discussed explicit and implicit fees, the implicit fees for SPIAs run about 1% and 2% for Indexed Annuities. The biggest example of a hidden fee or an implicit fee would be the spread between the interest that an insurance company earns and what it pays to its annuity holders.
If I made minor errors in my presentation above, Stinky can correct me as I did a lot of analysis of these some years back. It has been a while since I have done detailed analysis of Variable Annuities but pretty much I break them up piece by piece and analyze the pieces individually. These can be very complex to analyze, I am an informed amateur investor but I am not an Actuary. Some of these are complex enough you probably need an Actuary's opinion, the best I can do is a rough and approximate analysis.
Statistics: Posted by nedsaid — Sat Jul 13, 2024 11:23 pm