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Not All Variable Annuities Have High Fees

Variable Annuities (VAs) have their good points, offering tax-deferred investing in mutual fund-like subaccounts and few limits on how much you can save. But the advantages have come with prohibitively high costs, often including sales commissions, high insurance and administrative fees, and surrender charges for withdrawing your cash. Now, finally, low-fee VAs are improving the tradeoffs.

For tax-deferred retirement saving, employer plans such as 401(k)s and personal IRAs should be your first choice. But in 2008, there’s a $15,500 ceiling for 401(k) contributions; though if you’re at least 50, you may be able to save an additional $5,000. For IRAs, the 2008 limits are $5,000 if you’re under 50, and $6,000 if you’re 50 or older. If you want to go beyond these limits, VAs, too, let you postpone taxes on investment earnings (though you won’t get to contribute pre-tax dollars as you can with a traditional 401(k)).

Most VAs, however, charge sales commissions that immediately reduce the value of your investment. Then, on top of asset-based management fees for the investment subaccounts you choose, you’ll pay insurance and administrative expenses that are normally also calculated according to the size of your investment. Together, those charges may drain away an additional 2%, 3%, or more each year from your account. Then there are the surrender charges. Often, these diminish gradually, starting at, say, 7% if you withdraw your money during the first year of ownership then dropping by a percentage point each year.

New-style products, such as the Monument Advisor flat-fee VA from Jefferson National Life Insurance, do away with many of these charges. There is no commission and no surrender charge. But Monument Advisor’s most innovative feature is its flat monthly insurance fee of $20. That could result in significant annual savings, and the more you invest, the more you save compared with a normal asset-based fee.

Suppose you put $50,000 into a traditional VA with a 1% insurance charge. That will cost you $500 a year. That’s more than twice the flat $240 you’d pay for the Monument Advisor VA. If you invested $500,000, the gap is much wider, with a charge of $5,000 for the traditional product compared with the same $240 for Monument Advisor. The new annuity requires a minimum investment of $25,000.

If you want to switch from a high-fee annuity to Monument Advisor, you could make what is known as a Section 1035 exchange that avoids the immediate taxes you’d pay if you simply withdrew your money. But you must determine whether switching will require paying a surrender charge. Also, a new surrender charge period could begin when you exchange into a new annuity, and a new annuity may have higher annual fees and charges than the old annuity, which will reduce your returns. All this must be considered when looking at switching to the new Monumental Advisor VA. Also, keep in mind that VAs are long-term investments, and you must carefully consider the investment objectives, risks, charges, and expenses of the underlying funds of a VA before investing.

If you’re looking for a way to save for retirement beyond your company retirement plan or an IRA, we can help you determine if this new product is suitable for you. Or if you own a traditional VA, we can help you calculate whether it would pay to switch to this product.

This is neither an offer nor a recommendation for the sale of a security, which can be made by prospectus only. Before investing, you should carefully read a prospectus, which can be obtained by calling our office or from contacting the fund company directly.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc.® and is not intended as legal or investment advice.

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