With interest rates still elevated compared to a few years ago, sales of these insurance products hit record levels in 2023 and stayed strong through 2024.
But tucked inside many of those contracts is a layer of fees that can quietly shrink your returns for decades.
Unlike a 401(k) or a plain index fund, an annuity is an insurance product, and insurance companies build in costs at nearly every turn.
The tricky part is that many of these charges don't show up as a single line on your statement.
The most common fee is the mortality and expense charge, often called an M&E fee.
It typically runs about 1.25% per year for variable annuities, according to industry data, and it pays for the insurance guarantee plus company overhead.
On a $200,000 account, that's roughly $2,500 gone before your money even has a chance to grow.
If your annuity invests in subaccounts that look a lot like mutual funds, those funds charge their own expense ratios—often another 0.5% to 1% annually.
Stack on an optional living benefit rider, like a guaranteed income stream, and you might add 0.5% to 1.5% more each year.
Do the math and a variable annuity can easily cost 2% to 3% annually, sometimes more.
A study from the RAND Corporation found that variable annuity fees averaged about 2.3% a year.
Over a 20-year retirement, that gap compounds in a way that's hard to recover from.
If you want out early, most contracts hit you with a fee that starts around 7% in year one and steps down over five to seven years.
Some newer products stretch that schedule to 10 years.
That means switching to a cheaper option can cost you thousands.
Where people get burned is buying an annuity inside an IRA.
You already get tax deferral from the IRA, so you're paying for a feature you don't need.
Advisors call this "annuity wrapping," and it's one of the most common—and costly—mistakes in retirement planning.
First, ask for the full fee disclosure in writing before you sign anything.
Second, compare the total annual cost to a simple alternative like a low-cost index fund, which might run 0.03% to 0.10%.
Third, ask whether a "no-load" or fee-based annuity fits your situation better—they exist, and they skip the commission-heavy structure.
If guaranteed lifetime income is your goal, a plain single premium immediate annuity, or SPIA, is often cheaper and easier to understand.
You hand over a lump sum, you get a monthly check for life, and the fees are baked into the payout rather than layered on top.
The bottom line: annuities aren't automatically bad, but the fees can be.
For most households, the difference between a 0.5% and a 2.5% annual cost is the difference between a comfortable retirement and a tight one.
Final Thoughts
Read the disclosure, ask hard questions, and don't let a friendly sales pitch rush you past the numbers that matter most.