You're in the Driver's Seat
Perhaps two of the most appealing features that Variable Annuities (VA's) offer is the option of "self-directing" your invested dollars among various sub account portfolios available within the plan you own.
For those less adept at choosing the right sub-accounts, most VA's will offer Target Retirement Date (fully managed accounts) or asset allocation type accounts at no extra charge.
Several of the nation's fund companies have teamed up with insurance carriers to manage these assets raised from both individual investors and corporations.
These may include names such prominent names as American Funds, Blackrock, Fidelity, Janus, Nueberger & Berman, Franklin-Templeton, Oppenheimer, American Century, J.P Morgan and many others.
It's not unusual to find as many as 20 to 40 no load portfolios options to choose from, including index funds, growth stock funds, a money market fund, international equity, emerging market accounts, natural resources and gold, government and corporate bonds, total return type funds and more.
Generally, the investor can allocate among as many of these accounts as he or she wishes, although some impose a minimum account value per portfolio. With most VA's there is no restriction in moving from one sub-account to another and a great percentage will allow you to reallocate your portfolio up to once per day at no additional cost.
Cost & Fees
According to industry averages, most VA plans charge between 1.25% and 1.4% annually for what is called a Mortality & Expense risk charge (M&E). This charge is what the insurance company's levy for sponsoring and administrating your plan. This fee for service also guarantees that you cannot outlive your annuity payments should you elect a 'annuitize' the contract at some point in the future. Of course, this is based on the claims-paying ability of the issuer.
In addition to the M&E expense, investors will also incur investment advisory fees which are a combination of the Management Fees and Operating Expenses for each specific sub-account they have money invested in. These fees will vary based on the sub-account's underlying investment objective. The prospectus will contain a table of these expenses and they are expressed as a percentage of the underlying sub-account net assets.
The last fee an investor may or may not incur is an annual Administrative Expense. This expense may be expressed as a percentage of the underlying sub-account net assets or as a flat fee. The typical percentage may range from .0% to .15%, and the flat fee may range from $0.00 to $50.00. Again, it is HIGHLY RECOMMENDED that you review the prospectus carefully for a more complete description of any fees and expenses you may incur.
We are of the opinion that you should strive to secure a VA plan the levies an annual expense M&E ratio of around 1% or less.
Direct vs. Independent
There are direct distributors of VA plans, which may charge an even lower expense ratio, however, you generally must sacrifice the personal attention and care that an independent broker or financial advisor provides.
For example, an independent advisor can help you determine which one or combination of funds bests suits your short and long term goals. The advisor will also help monitor your account activity and make suggestions along the way.
Today, the vast majority of VA plans are purchased through independent annuity brokers and financial advisors.
To help potential investors, like yourself, learn more about What to Look for in a Variable Annuity program, you can click HERE.
Surrender Charges & Liquidity
The majority of VA's also include a surrender period. The industry average is 7 years and most decline by a given certain percentage each year. For example, you may have a 7 year surrender period which declines annually like this: 7%, 6%, 5%, 4%, 3%, 2%, 1%.
What this simply means is if you were to surrender your contract in year 4, the carrier would impose a 4% surrender charge on the contract value.
To avoid potential surrender charges, most carriers provide a rather liberal annual withdrawal allowances. The industry average is 10%; however, there are some as high as 15%.
And there are others, for example, that allow you to take all earning in any given year, or partial principal and no earnings. Be sure to read your prospectus carefully as it will explain your liquidity options in detail.
Managing Your VA Investment
To some, selecting the right one or combination of sub-accounts with your long-term objective in mind can be somewhat difficult.
That's why a professional advisor can potentially play such an important role after your purchase.
At Fielder Financial Management we provide Asset Allocation Strategies, Target Retirement Date options and ongoing product consultation to help keep you in line with your stated investment objectives and goals. We are compensated for these services directly by the insurance carrier you select.
Action To Take
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Disclosure: Variable Annuities are long-term investments designed for retirement purposes and are subject to market fluctuations, investment risks and possible loss of principal. For more complete information about variable annuities,including charges and expenses, obtain a prospectus by calling 1-800-480-7526. Read it carefully before you invest or send money. Withdrawals may be subject to income tax and a 10% IRS imposed penalty may apply on withdrawals made prior to age 59-1/2. Consult your tax advisor.