My Annuity is More Expensive than

my Mutual Fund


This simplistic assertion should always be re-examined on a case-by-case basis the 2 financial instruments are apples and oranges apart in terms of their

purpose, structure, tax status, liquidity and average investor type.

Any decision to choose between either a mutual fund or annuity based solely on cost may ultimately be a red herring. What may matter more in the long run is whether the cost for the mutual fund is worth the alleged risk and consequent opportunity contained therein. Similarly, any costs associated within an annuity contract must be weighed for the subjective value of safety and predictability.


Furthermore, since there are thousands of both product types out there, you will have to do your own research in terms of what costs may be inherent for the product that you may have or that you might be seeking.


In the interest of posterity this article will only discuss generalities, not specific product offerings. Mutual funds and

and annuities often appear and disappear depending on what is the flavor of the current season and any reference to a particular product may become stale to future readers.


Let's start with the mutual fund. The SEC does a thorough job of explaining all of the fees associated with mutual funds on their website. For the serious reader, all one has to do is find the fee category and then call one's mutual fund company and ask what those specific fees are in his or her mutual fund.

The SEC breaks down a variety of potential mutual fund fees into the following categories:


- Sales Loads

- Redemption fees

 -Exchange fees

- Account Fee

- Purchase Fee

- Management fees

- 12B1 fees

- Other fees

IN addition, the SEC is admirably transparent is exposing the nuances of so - called "no load" funds and how such a fund may or may not charge a traditional sales load, but still contain expenses.


Quoting directly from their site :


          For example, a no-load fund is permitted to charge purchase fees,   

                                   redemption fees, exchange fees, and account fees,

                                   none of which is considered to be a "sales load." In

                                  addition, under FINRA rules, a fund is permitted to

                                 pay its annual operating expenses and still call itself

                              "no-load," unless the combined amount of the fund’s

                                12b-1 fees or separate shareholder service fees exceeds

                                     0.25% of the fund’s average annual net assets.




                              The SEC provides helpful calculators to ascertain how

                             fees may affect your earnings in your mutual fund.


                           Once again, you must do the math on your own fund

                           to know total costs !!

Now on to the Costs of Owning Annuities...

Variable Annuities are essentially mutual funds offered through insurance companies, but these funds have additional costs built into them to provide for the guarantees offered by the insurance company selling them. These additional guarantees typically provide principal protection on death, or guaranteed lifetime income amounts, or guaranteed lifetime withdrawal rates. The costs associated with these guarantees may be in addition to some of the costs mentioned for general mutual funds above. These fees are known as mortality and expense fees, administration fees, contract maintenance fees and possibly some income rider fees. Ask your variable annuity provider what those fees are. They can add up. Wells Fargo does a neat job of explaining those fees right here.

Fixed Annuities are interesting in that they do not charge fees per se, although the costs associated with obtaining the annuity, such as commissions, are reflected in the numerical guarantees that the contract provides as well as the surrender charges that are only levied if a policy holder prematurely cancels the contract or withdraws more than their annual liquidity privilege (usually 10%). So you could say that the fees are hidden in a fixed annuity, although not deliberatively. They are simply built into the product itself, perhaps like buying a vehicle.


At no time will your premium payment ever reflect a sales charge or fee in a fixed annuity. In fact, 100% of your premium earns the contractually guaranteed rate of return, whether that be an annually declared rate of return, or a multi - year guaranteed rate of return. This begs a question:


Do annuity providers get a free ride regarding disclosure of sales charges ?


Since fixed annuity products are considered low, (or no) risk, the regulatory requirements for the annuity industry, both within and without, are less severe than what is required from the SEC for securities products (authors opinion).


Fixed Indexed Annuities are identical

to their fixed brethren above, at least as far as

commissions not being taken directly out of

principal paid into the policy. Once again, these

costs can only be reflected in early

cancellation charges known as surrender

charges that come into play for withdrawals

in excess of annual liquidity provisions.

Or the costs associated with a fixed

indexed annuity can be reflected in the

contractual provisions as well.


For example, a standard S and P Mutual

fund may have 100% growth opportunities

minus certain annual fees, whereas a

standard fixed indexed annuity contract

may have only a 65% participation rate

(owner participates in only 65% of that same growth)

for no annual fee. (Of course, the annuity contract

guarantees that the principal balance will not go down as well).

Or the annuity provider may charge a fee, for example, of 1.25% for 80% of that same growth. All index providers have some limitations built into their crediting strategies that are known as either fees, caps, or participation rates; all of these limitations could be construed as costs as well.


The fixed indexed annuity may also charge an annual rider fee if the owner has chosen the lifetime income rider option at policy issue.


So it would be nice if the math was real easy to choose between such divergent instruments, but one can see it is not.


Calculating potential returns with mutual funds involves ascertaining the growth opportunity and then subtracting known costs.


Calculating potential growth in an indexed annuity involves knowing the contractual guarantees and then studying how potent the crediting methodologies can be.


Good Luck !




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