Consider fees when buying variable annuities with withdrawal guarantees
I asked for it. In a column about variable annuities that guarantee minimum withdrawals for life, I said potential buyers must decide whether it’s worth paying the fees that annuities charge for these guarantees.
Since then, questions have been raining in about what are reasonable fees.
Rather than just throw out a number, I’ll explain how fees work (and why they may be higher than they appear).
From experience - my wife Georgina has owned such an annuity since 2005 - I believe variable annuities with minimum withdrawal guarantees and modest fees can be appropriate for conservative investors. Willing to invest more aggressively thanks to the guarantees, investors may achieve greater returns even after fees than with conservative but low-yielding investments.
You need to consider the annuity’s overall fees, however, including so-called mortality and expense risk charges. A low fee for the guaranteed withdrawals is not good enough if the other fees are high. I would not pay more than 2 percent total in annual annuity insurance fees.
Low fees are getting harder to find. Insurance companies, stung by severe market losses in 2008, have been raising guaranteed withdrawal fees while reducing benefits and even discontinuing products. Fidelity Investments, which launched a low-cost Fidelity Growth and Guaranteed Income annuity with fanfare in the fall of 2007, first raised fees and then stopped selling the annuity last spring.
I should stress that the withdrawal guarantees do not insure the account value. They guarantee only that you will receive minimum payments for life, based on a “protected withdrawal value’’ or other such term, which typically equals your initial investment, or your investment growing at a set percentage every year you don’t take withdrawals. Such “protected’’ value is separate from the actual account value and is just a number used to calculate the minimum payments.
But withdrawals do come from your account balance, emphasized Michael Bartlow, the founder of www.AnnuityGrader.com, an independent annuity comparison website.
And that can easily happen in a down market. That’s because, unlike the annuity Georgina bought, all the annuities I see now compute the guarantee withdrawal fee as a percentage of the “protected’’ value, not of the actual account value.
Say the protected value is $200,000 but the real account value is only $150,000; if you are paying a 1 percent annual fee for the guarantee, that’s $2,000 or 1.33 percent of the account value. If you are also withdrawing 5 percent of the protected value a year - a common guaranteed payout - that’s $10,000 or 6.67 percent of the account value. Between withdrawals and fees, your account value is going down 8 percent a year.
Humberto Cruz can be reached at AskHumberto@aol.com. 
