Americans handed roughly $400 billion to annuity sellers last year, according to industry tracking group LIMRA, and a big chunk of that money never makes it into anyone's retirement account.
Some are printed plainly in the paperwork.
Others are buried in language that requires a magnifying glass and a finance degree.
The first thing to understand is that annuities aren't one product.
They're a category, and the fee structure changes depending on which one you buy.
A plain fixed annuity might carry no explicit annual fee at all, because the insurer makes its money on the spread between what it earns and what it pays you.
A variable annuity, by contrast, can stack four or five separate charges on top of each other, and those charges compound against you for decades.
The most-cited number is the mortality and expense charge, usually 1% to 1.5% of your account value every year.
That's the insurance company's cut for the guaranteed death benefit.
Then come fund management fees, typically 0.5% to 1%, which mirror what you'd pay in a regular mutual fund.
Add administrative fees, and a typical variable annuity is quietly draining 2% to 3% annually before you've bought a single rider.
A guaranteed income rider sounds like protection, and it is, but it can add another 1% to 1.5% per year.
Stack a long-term care rider and a death benefit enhancement on top, and a 3% base can climb toward 4%.
On a $200,000 account, that's $8,000 a year leaving your balance whether the market is up or down.
Surrender charges deserve their own warning.
Most annuities lock you in for five to ten years, with a penalty that starts around 7% and steps down annually.
Sell in year two and you could hand back thousands.
This is the single most common complaint state insurance regulators hear, because buyers often don't realize their money is effectively frozen.
The agent or advisor selling it, who typically earns a commission between 1% and 7% of your deposit, paid upfront by the insurer.
That's not automatically sinister, but it's a real incentive, and it explains why annuities get recommended so often to people who'd be better served by a simple index fund in a tax-advantaged account.
None of this means annuities are worthless.
A retiree who wants a guaranteed paycheck for life and has maxed out other options may find a low-cost fixed or income annuity genuinely useful.
The problem is the wrapper, not the concept.
Simple products with transparent pricing exist, and they usually look boring on a brochure, which is exactly why they're harder to find.
If you're being pitched one, ask three questions in writing: what's the total annual cost including every rider, what's the surrender schedule, and how much does the person recommending it get paid.
The annuity industry has spent decades lobbying against a stricter fiduciary standard precisely because the fee structure doesn't survive close inspection.
That alone should make you read the fine print twice.
Final Thoughts
Your retirement doesn't need a middleman taking 3% a year to feel safe.