Annuities can be a useful way to invest in a tax-deferred manner. Figuring out the fees and other costs that annuities charge can be more challenging than with other types of investments, and it's important to understand fully just how much you have to pay to buy an annuity. In particular, fixed-indexed annuities charge commissions that some complain are excessive and divert money to sales professionals that would otherwise go toward an investor's savings. Let's look more closely at fixed-indexed annuities and associated fees.
What fixed-indexed annuities areThe idea behind a fixed-indexed annuity is that it provides a link between the annuity's return and the returns on a certain asset class. For instance, one popular fixed-indexed annuity pays a fraction of a stock market index's base return, providing a minimum guaranteed rate even if the stock market goes down or stays flat during the measuring period.
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The primary benefit of the fixed-indexed annuity is that it offers investors the best of both worlds. You won't get the full return of a stock index in a rising market, but you'll get a portion of it. At the same time, you don't have to worry about losing money when a bear market hits, because the annuity structure limits potential losses.
The trade-off, though, is the cost involved. Fixed-indexed annuities often come with fairly high annual fees, either charged directly or built into the structure of the investment return. They can also high commissions.
Commissions on fixed-indexed annuitiesWhen they first became popular, fixed-indexed annuities earned a reputation for being particularly egregious in their charging fees. Although different products vary, some third-party sources have estimated average commissions for these products topping 10%, or roughly double the typical commission on regular fixed annuities. Investors aren't able to see what they pay in commissions directly, but it has a negative impact on the returns they get and lengthens the surrender period involved.
More recently, though, there have been efforts to rein in fixed-indexed annuity commissions. In 2014, Wells Fargo announced that it would only include fixed-indexed annuities that limited commissions to 4%. Surrender periods can't go beyond eight years, and the platform permits only a couple of methods for crediting accounts with appropriate returns based on the index's performance. Similar moves could reduce commissions even further.
Before you buy a fixed-indexed annuity, you should know how much of your money will go toward commissions. If your salesperson doesn't want to respond to that question, your next move is a simple one: find a professional who isn't afraid to give you the answers you deserve.
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