Already gaining in popularity among advisors, low-cost annuities could receive a further boost if the Department of Labor's fiduciary proposal goes into effect.

The push by regulators for greater advisor accountability and more prudent investment recommendations will be a boon for products that offer client-friendly features and lower costs. This may encourage more annuity providers to compete on price, following the trend already set in passive ETFs.

Advisors have slowly embraced low-cost annuities in recent years, and their sales have jumped from $3.6 billion in 2010 to nearly $6 billion in 2014, according to the Insured Retirement Institute, the trade association that represents annuity sellers. The IRI defines low-cost as variable products that have no sales commissions or surrender charges and keep their annual expenses under 1%.

Bells and whistles like income guarantees, living benefits and payouts indexed to stock market returns have increased these products' popularity among some advisors and their clients. Although relatively unheard of 15 years ago, there are now more than 220 living benefit products in the variable annuity space, Morningstar analyst John McCarthy says.

Annuity providers and distributors should take the opportunity to walk interested advisors through the annuity options available for their clients, though, as variable annuities are complex beasts. Since they are amalgams of mutual funds with myriad benefits, they have several layers of fees.

Advisors need to understand that the mortality, expense and administrative charge pays for the cost of the insurance, administration and commissions; this is expressed as a percentage of the amount in the account.

According to AnnuityFYI, an online annuity service, the average industrywide fee is 1.4%. Charges below 1% put the product in a low-cost category. So-called no-load annuities don't pay commissions.

Advisors should understand that insurance companies don't want customers withdrawing too much of their money too quickly, so they impose surrender fees if funds are withdrawn before a certain time period (seven years on average). Low-cost products don't have surrender fees, and there are also short surrender products subject to withdrawal surcharges for only a few years.

Advsiors also need to know that variables also charge subaccount fees, known as expense ratios. They vary widely from more than 1% to under 0.3%.

There are also miscellaneous fees such as maintenance charges, which are usually flat fees. The industry average is $35, which may be waived for accounts over $50,000. As with most insurance products, clients pay extra for special riders such as lifetime income and enhanced death benefits. Those options tend to add 0.4% to 1.1% to annual expenses.


There are a handful of companies that are acknowledged by advisors to have the lowest cost structures. All of the variables offer an array of mutual funds, but they vary in cost depending upon objective.

The cheapest options are broad-index-funds - like those offered by Vanguard - and the most for those with more specialized objectives. The average subaccount expense is 0.96%, which is slightly lower than stand-alone mutual funds, acording to Morningstar.

Generally, the largest low-cost providers have been in the business for decades, are active in the institutional market and offer economies of scale.

TIAA-CREF, for example, offers an Intelligent Annuity product with subaccount fees as low as 0.09% annually.

Pressure to achieve cost savings has led to quite a bit of cross-pollination among these products. Vanguard, for instance, a traditional low-cost mutual fund complex, may be represented in other plans, such as Jefferson National.

Likewise, low-cost funds from Dimensional Fund Advisors in can be found in several annuity programs.

Providers and distributors should take heed that advisors seeking bargains for their clients will look to take advantage of this competition.

"If an appropriate client situation surfaces, the lowest-cost variable annuity that I am aware of is the Jefferson Nation Monument Advisor annuity," notes Gil Armour, an advisor with SagePoint Financial in San Diego.

"Instead of a hefty 1.25% mortality and expense ratio like most annuities, they charge a flat $20 per month," he explains. "In the right situation, that could save the client a lot of money in ongoing fees."


The advisor's decision to use annuities hinges on variety of factors.

Taxes are one consideraion. Since withdrawals are taxed at full marginal rates as ordinary income, the only advantage of annuities from a tax perspective is their ability to defer them. A tax-efficient portfolio of mutual funds or exchange-traded-funds that generates capital gains at a lower tax rate may be more suitable for many clients.

The use of riders is another factor weighed by advisors. These require a further cost benefit analysis, since advisors have to weigh the additional expense against alternative strategies to protect their clients' future income.

"Riders may be more expensive than a mutual fund or managed portfolio," says Joe Heider, president of Cirrus Wealth Management in Cleveland. "They cost from 1.25% to 1.5% extra. Are they worth it?"

Besides comparing annuities' costs and features, another basic consideration is the financial strength of the issuing company.


But annuity selection depends greatly on clients' inclinations and risk tolerance. Some may insist on a guaranteed income benefit and be willing to pay the extra cost. Others may be more interested in saving money.

Advisors tied into broker-dealers or wholesalers may access different products than fee-only planners. But for advisors who recommend annuities, the Labor Department's proposed fiduciary rules for retirement advice have the potential to be a game changer.

If commission-based advisors are forced to hew to a new fiduciary standard, they will inevitably pay much more attention to the lowest-cost products and rethink some of the retirement income strategies they offer. 

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