Variable Annuities

Its value rises and falls with those investments, and it carries fees and withdrawal charges, called surrender charges, that many other investments do not. Variable annuities are often sold to retirees, and sometimes for money already held in a retirement account that is tax-deferred. Losing money in a variable annuity is not, by itself, a claim. The key questions are whether the annuity fit the investor and whether the professional who recommended it fulfilled their duties.

This May Not Be Your Fault

If the fees or withdrawal charges in your annuity surprised you, you are not alone. The Financial Industry Regulatory Authority (FINRA), which oversees brokers, says variable annuities are a leading source of investor complaints because they are so complex.

That is why the professional who sold it had a duty to you. Under FINRA Rule 2330, a broker may not recommend buying or exchanging a variable annuity without a reasonable basis to believe it is suitable and that you were told about key features, including the surrender period, surrender charges, and fees. A supervising principal at the firm must also review the sale. Regulation Best Interest, from the U.S. Securities and Exchange Commission (SEC), adds that a broker must not put their own financial interests ahead of yours.

How Variable Annuities Work

A variable annuity lets you direct your payments to a menu of investment options, and the SEC’s Investor.gov explains that your return depends on how those funds perform, with no limit on gains or losses. Several layers of cost come with it:

• Surrender charges — a fee if you withdraw money within a set number of years. FINRA notes that surrender periods can run eight years or more, and the charge generally declines over time.
• Mortality and expense (M&E) charges — a yearly fee, calculated as a percentage of your contract value, that pays the insurer for its insurance risk and may help fund the seller’s commission. The SEC’s variable annuity bulletin gives 1.25% per year as an example.
• Administrative fees — a flat yearly fee or a small percentage of the contract value.
• Fund expenses — you also pay, indirectly, the fees of the funds you choose.
• Rider fees — optional death benefits and income features usually cost extra.

Taken together, FINRA says a variable annuity’s annual expenses are likely to be much higher than a typical mutual fund’s. Investor.gov also points out that inside an individual retirement account (IRA) or 401(k), you get no additional tax advantage from a variable annuity, because those accounts already defer taxes.

Exchanges deserve special care. The SEC’s Variable Annuities: What You Should Know explains that a new surrender period generally begins when you exchange into a new annuity. FINRA’s guidance on exchanges puts it plainly: just because you can exchange does not mean you should. Rule 2330 requires a firm to weigh a new surrender charge, a new surrender period, lost benefits, and higher fees.

Example: a retiree is moved from one annuity into a new one, pays a withdrawal charge to leave the first, and starts a fresh surrender period on the second, so their own savings stay tied up for years while the broker earns a new commission.

Common Examples of Variable Annuity Claims

• A variable annuity recommended to a retiree who needed ready access to their savings, despite a long surrender period — see Unsuitable Recommendations
• An annuity purchased inside an IRA or other retirement account, where the tax deferral adds nothing, with no honest explanation of why it was worth the added cost — see Regulation Best Interest
• Fees, surrender charges, or rider costs downplayed or never explained — see Misrepresentation and Omission
• An existing annuity replaced with a new one, sometimes called switching or “twisting,” that triggered a surrender charge and restarted the clock
• Subaccounts that were too aggressive or too concentrated for the investor’s age and goals — see Overconcentration
• A firm that approved the sale, or a pattern of exchanges, without a real review — see Failure to Supervise
• Annuities pitched to older investors at seminars, with little regard to their needs — see Elder Financial Abuse

How Can You Protect Yourself From Variable Annuity Losses?

A variable annuity can have a place in some retirement plans, but it calls for more questions than most products do. A few steps that help:

• Ask for the total cost, in dollars. Ask what you will pay each year across insurance charges, fund fees, and riders, and compare it to a plain mutual fund.
• Ask when you can get your money out. Find out how long the surrender period lasts and what you would pay to withdraw in each year.
• Ask why an annuity, if it is in an IRA. The tax deferral you are paying for may already be built into the account.
• Compare side by side before any exchange. Look at the new surrender period, any benefits you would lose, and the new fees. Be cautious about exchanging just for a bonus.
• Ask how your broker is paid, and check their record. FINRA’s free BrokerCheck tool shows a broker’s background and any complaints.

Signs Your Variable Annuity May Have Been Unsuitable

• You were not told about a surrender charge, or you learned about it only when you tried to withdraw money
• The annuity was bought with money held in an IRA or another retirement account
• A broker recommended replacing an annuity you already owned
• The surrender period runs well into your later years, or you needed the money sooner
• The annuity took up most of your savings
• You were sold the annuity at a seminar or in a single meeting, with pressure to decide quickly
• You were never shown a prospectus or a side-by-side comparison with what you already had