Response: Thanks so much for the question Patricia. I am not a huge fan of broad stroking remarks like that and you should be careful of the source. Fear is a popular sales tactic and is used in all industries including the financial services industry, most often by competing asset classes. I think you'll find that equity managers who do not employ annuities put this type of information out to scare people out of buying them and into seeking their counsel to buy their widget. Having said that, there are SOME annuities that are very burdened by fees, but the impression is often given that ALL annuities share this trait.
There are four different types of annuities available today, and I will cover each of them as they relate to fees.
Immediate Annuities: Where you are basically trading a lump of your money for an income stream similar to a lotter payment has NO FEES. You aren't going to earn much money here.. but no fees non the less.
Simple Fixed Annuities: These are principal protected annuities that are very safe and pay a simple interest rate... also NO FEES. You know where interest rates are right now, so this variety doesn't get a whole lot of looks right now, but if rates should continue to rise will probably gain popularity once again.
Indexed Annuities: This also falls into the principal protected variety and the majority... but not all of these products have NO FEES. There are some exceptions to the rule here as some of them do charge a fee and if you start taking on income riders and/or death benefit riders those will always cost you a fee. It's worth noting that the best performing indexed products available today are the least exciting for they have no bonus enticements, flashy riders and all the other widgets that are easily sold but somehow mathematically don't look so good after a year or two. I'll save the rest of that story for another time.
Variable Annuities: Last but not least comes the infamous variable annuity. Gained popularity during the mid and late 80's when the markets where screaming along and know one cared about fees... until the bottom dropped out. The market corrected, people lost money which they didn't think they could ever lose, people wanted to get out because they were losing and didn't like that they had to pay a fee to do it and then the discussion of costs became important. People filed complaints left and right and since then ALL annuities took on a bad flavor. I don't use variable annuities with my clients because of the fees and my opinion is that there are much more efficient ways to expose yourself to the market than using this type of vehicle. You'll pay on average between 2.5% and 5% in fees especially again if you start tacking on income riders and death benefit riders... remember as a general rule if you are buying guarantees you are going to pay for them and will most definitely play against the total return of your investment.
Summary: All annuities to not have fees. Some do and some additional benefits that you add to your contract will certainly cost you as well. My advice is to go lean and mean and try not to make what is supposed to be an investment vehicle into something that it's not... like a long term care policy or life insurance policy. Everyone has their own opinion though, and now you have mine. I hope you learned something Patricia and I thank you for your question.
Carl Barnowski has 25 yrs. of experience as a retirement income expert specializing in principal protected annuities.