How to Help Clients Understand and Evaluate Variable Annuity Fees and Charges

Advisors are a crucial resource for clients exploring the role for variable annuities in their retirement plans. One of the most important services advisors can provide during this process is to explain and evaluate annuity fees and charges.

As a hybrid financial product with both insurance and investment characteristics, variable annuities provide unique benefits and features. Some of these features come with fees or charges that clients may not have encountered with other financial products, raising potential questions about the costs of variable annuities.

To help clients understand these fees and charges, advisors can adopt an approach that focuses on assessing the value that an annuity delivers — most notably, the ability to secure a guaranteed retirement income stream. This benefit-oriented focus can help advisors walk clients through the main types of variable annuity fees and charges and highlight the services or benefits the client receives in exchange. Through this analysis, advisors and clients can feel more confident about choosing a variable annuity that’s a good fit for an individual’s overall financial goals.

When first investigating variable annuities, advisors can help their clients understand these products by explaining the three primary categories of fees and charges that support their features and benefits. The tables below feature a breakdown of the fee structure for a Brighthouse Financial variable annuity with optional FlexChoice Access living benefit rider:

Once clients are familiar with the common categories of variable annuity fees and charges, advisors can deepen their discussions by comparing costs and benefits among different annuity providers.

For example, advisors can explain how different annuities’ living benefit riders would accommodate married couples:

• Many variable annuities only provide lifetime income for one spouse (the owner) unless the couple pays an additional charge.
• The annuity owner also must decide whether to cover one or both lives — and when to begin taking income — at the time of purchase.
• In contrast, the FlexChoice Access living benefit rider for Brighthouse Financial variable annuities provides lifetime income for both spouses at no additional charge — and owners don’t have to decide when to begin taking income at purchase.
• The FlexChoice Access living benefit rider also bases the withdrawal rate on the age of the older spouse, versus other annuities that base the withdrawal rate on the age of the younger spouse. This feature can help clients qualify for a higher withdrawal rate sooner because withdrawal rates typically rise with the age at which the annuity owner begins receiving income.

Investment fees within variable annuity subaccounts also range widely, based on the fund choices offered by the annuity provider. Because these are the same type of fees that clients would pay on funds held in other accounts, such as an IRA, advisors can look for an annuity that has a fund lineup that’s appropriate for a range of client needs and offers competitive pricing.

One approach is to start by comparing an annuity’s investment fees to the industry average for funds offered in variable annuity subaccounts. Investment research from Morningstar provides data on individual fund fees as well as category averages.

To illustrate this type of review, here is a look at the average investment fees charged for a range of asset classes within a Brighthouse variable annuity, alongside Morningstar averages for the same asset classes in the variable annuity subaccount category. Note that averages are just a starting point for this review. Advisors can examine individual funds within each asset class and look for options with lower fees that might appeal to more cost-sensitive clients or higher-fee options that might appeal to clients willing to pay more for funds that feature a unique investment approach or are managed by a client’s preferred mutual fund companies.

Active Funds

Average Investment Fees in Variable Annuity Subaccounts: Active Funds¹

Passive Funds

Average Investment Fees in Variable Annuity Subaccounts: Passive Funds²

Source: Morningstar, Inc. Fund fee data as of May 17, 2018.
Methodology: Data retrieved from Morningstar Direct software using “U.S. Variable Annuity Subaccounts” as the selected investment universe. Equity lists were separated into actively managed and passively managed funds. For both active and passive groups, Large Cap category includes Large Cap Growth, Large Cap Blend and Large Cap Value funds. Mid Cap category includes Mid Cap Growth, Mid Cap Blend and Mid Cap Value funds. Small Cap category includes Small Cap Growth, Small Cap Blend and Small Cap Value funds. All funds categorized as “Fund-of-Funds” were removed from each list, as were funds that did not have a stated “Annual Report Net Expense Ratio.” All averages are calculated as simple averages.

Facilitating this kind of research is part of the critical role that advisors play as a translator between an annuity’s costs and benefits and the client’s individual financial needs. With their experience helping clients define their financial goals, advisors are in a unique position to assess how adding a variable annuity to a client’s diversified financial plan supports those goals.

Taking the time to explain variable annuity fees — along with the potential benefits and features that clients receive in exchange — can lead to more thorough conversations around the role of annuities in a financial plan. And with that deeper level of understanding, clients are more likely to feel confident about including variable annuities as a tool to help them pursue their retirement goals.