Annuities are pitched as a simple way to turn savings into steady retirement income.
What the brochures tend to skip is the fee stack buried inside the contract, and how much of your money it can quietly absorb over decades.
The first layer is the commission, and it's frequently the largest.
A single-premium immediate annuity might pay an agent 1% to 4%, but a variable or indexed annuity can pay 5% to 8% upfront, according to industry filings.
That cost isn't billed to you separately.
It's built into the payout rate or the contract's value, which means you feel it as lower returns rather than a line item.
Variable annuities typically carry mortality and expense fees of roughly 1% to 1.5% a year, plus underlying fund expenses of 0.5% to 1% or more.
Add riders like a guaranteed income benefit and you can tack on another 0.5% to 1.5% annually.
Stacked together, a variable annuity can run 2% to 3% or higher every year.
Indexed annuities work differently but aren't automatically cheaper.
They often skip a visible annual fee, but they pay for it with caps, participation rates, and spreads that limit how much market upside you actually capture.
A 10% index gain might translate to 4% or 5% credited to your account, and the difference is effectively the cost.
Most contracts impose a schedule that starts around 7% and steps down over five to ten years.
Withdraw more than the free amount during that window and you pay a penalty on top of ordinary income tax, plus a 10% federal tax hit if you're under 59½.
Ask for the total annual cost in writing, not just the headline fee.
Request the commission, the M&E fee, every rider charge, the fund expense ratios, and the full surrender schedule.
If a salesperson can't produce those numbers quickly, that tells you something.
Newer no-commission annuities exist, sold directly or through fee-based advisors who charge an asset management fee instead.
They can be cheaper, but they aren't free, and the payout rates sometimes run lower to compensate.
One rough check: multiply the annual fee by the number of years you expect to hold the contract, then compare that total against the guaranteed income you'd actually receive.
If the fees eat a meaningful slice of the guarantee, the product may not be doing what you think.
Annuities can make sense for people who want longevity protection and have maxed out other tax-advantaged options.
They rarely make sense as a default parking spot for a 401(k) rollover, which is exactly how they're often sold.
Final Thoughts
Read the fee table before the brochure, and get a second opinion from someone who isn't paid by the issuer.