Annuities have become a $4 trillion market, and sales are climbing as Americans look for guaranteed income in retirement.
But the fees buried inside many of these products can quietly shave years off your nest egg.
Unlike a simple index fund that might charge 0.03% a year, annuities often stack multiple layers of costs.
According to industry data, variable annuity fees frequently run between 2% and 4% annually once you add everything up.
On a $250,000 contract, that's $5,000 to $10,000 vanishing every year before you see a dime of growth.
There's a mortality and expense charge, typically 1% to 1.5%, which pays the insurer.
Then come administrative fees, fund management fees inside the subaccounts, and riders.
That living benefit rider promising lifetime income?
It can cost another 0.5% to 1.5% on its own.
A 2023 study from the Wharton School found that variable annuity investors gave up roughly 40% of their potential returns to fees and expenses over time.
The average investor in the study earned about 3.9% annually, while the underlying assets returned closer to 6.5%.
Fixed indexed annuities aren't off the hook either.
They skip the fund fees, but many carry surrender charges that start at 7% to 10% in year one and step down slowly.
Sell or move your money early, and you could hand back a chunk of your principal.
Caps and participation rates also limit how much market upside you actually capture.
Surrender charge schedules are the trap most buyers miss.
A typical contract locks you in for seven years, with penalties declining from 7% to zero.
That's seven years where your money isn't really yours, and where a better opportunity can't be chased.
The good news is that not all annuities are fee monsters.
Multi-year guaranteed annuities, also called MYGAs, often carry no explicit annual fee and simply credit a fixed rate for a set term.
Immediate annuities used for pure income can also be relatively transparent.
The key is asking for the total cost in dollars, not percentages.
Before signing anything, request the fee table in writing and ask three questions.
What is the total annual cost in dollars?
How long is the surrender period, and what does it cost to exit?
What would I earn on this same money in a low-cost alternative?
Regulators have started paying attention.
The SEC's best-interest rule and several state actions have pushed insurers to justify why a higher-fee product beats a cheaper one for a given buyer.
If an agent can't clearly explain every fee in plain English, that's your answer.
There are cheaper ways to build retirement income, and you deserve to know exactly what you're paying for the guarantee.
Our take: annuities aren't inherently bad, but the fee structure is where most buyers get hurt.
Final Thoughts
Treat any pitch without a written, dollar-based fee breakdown as a red flag.