Americans poured roughly $390 billion into annuities last year, according to Limra sales data, chasing guaranteed income in a world where the 10-year Treasury yields around 4% and pensions are nearly extinct.
What many buyers didn't study closely enough: the fee stack buried inside those contracts.
A typical variable annuity pays the agent or advisor 5% to 7% upfront, and that money doesn't appear as a line item on your statement.
Sell a $200,000 annuity and somewhere between $10,000 and $14,000 can vanish before your money ever gets invested.
Indexed annuities often run 4% to 8% in first-year compensation, sometimes more.
Then come the annual charges, which compound against you for decades.
Morningstar research has found that variable annuity fees commonly total 2% to 3% per year once you add mortality and expense charges, fund expenses, and administrative costs.
On a $200,000 contract, that's $4,000 to $6,000 drained annually, whether the market rises or falls.
Living benefit riders, the ones that promise lifetime income, frequently add 0.9% to 1.5% per year.
Stack a death benefit rider on top and you can push total costs past 3.5% annually.
For context, the average 401(k) plan charges about 0.5% all-in, according to 401k Averages Book data.
You're paying roughly six times more for the wrapper.
Fixed annuities look cleaner, but surrender schedules deserve scrutiny.
Most contracts lock you in for five to seven years, with penalties starting around 7% and stepping down annually.
Withdraw too much too soon and the penalty hits your principal, not just your gains.
Here's the part that trips people up: index annuities advertise market-linked growth with a floor of zero.
What the brochures downplay are caps and participation rates.
If your contract caps annual gains at 6% while the S&P 500 returns 22%, as it did in 2023, you keep the 6% and the insurer keeps the rest.
That gap is effectively another fee, just one that never shows up as a percentage.
Fee critics like Ken Nuss of AnnuityAdvantage argue that plain vanilla fixed annuities and multi-year guaranteed annuities, which often carry no explicit ongoing fees beyond surrender charges, can make sense for conservative savers seeking predictable growth.
The math gets ugly when commissions and riders pile onto complex products sold to people who don't need the guarantees.
Before signing anything, ask for three numbers in writing: the total first-year cost, the ongoing annual fee percentage, and the surrender schedule.
If an agent can't or won't produce them, that's your answer.
You can also compare against a simple alternative, like a Treasury ladder or a low-cost target-date fund, and see whether the guarantee is worth the drag.
One more thing worth checking: many annuities let you withdraw 10% per year penalty-free, and some insurers waive surrender charges for nursing home confinement or terminal illness.
Those clauses vary wildly by contract, so read the fine print rather than trusting the pitch.
Our take: annuities aren't scams, but the fee structure means the house wins by default unless you negotiate hard and buy only what you need.
Final Thoughts
For most Americans, the honest move is to price out a no-frills fixed annuity first, then decide whether a commission-heavy variable contract with riders is worth several decades of 3% annual drag.