Annuity holders are generally satisfied, but many are concerned about high fees. While the government enforces transparency, it doesn’t control the fees. To ensure better alignment with their financial goals, consumers should understand these costs and consider partnering with a fiduciary advisor.
Government’s Role in Annuity Costs and Fees
Given consumers’ concerns about high annuity costs and fees, it’s worth asking how the insurance industry and U.S. and state governments influence these fees.
In general, the federal and state governments regulate the annuity industry to ensure transparency and consumer protection, but they do not set policy rates or fees directly.
Federal Government
In this scenario, the federal government, through the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), monitors variable annuities and registered index-linked annuities.
State Government
All other annuities are regulated by U.S. state governments (both state and federal governments track variable-rate annuities). State governments monitor annuity providers’ finances and ensure that insurance companies follow government laws on customer regulatory practices.
“Overall, state insurance regulators have the most direct impact since annuities are considered insurance products,” says Danny Lee, founder of PinnacleQuote in Jacksonville, FL. “They oversee insurance companies to ensure they’re financially stable and complying with laws. Conversely, the federal government sets broader regulations, like tax rules, which can indirectly affect annuities.”
Here’s how that oversight breaks down:
- State governments primarily regulate annuities through their insurance departments, overseeing product approval and ensuring the financial solvency of insurance companies.
- Federal oversight, particularly for variable annuities, comes from the SEC and FINRA, which regulate sales practices and disclosures to protect consumers.
“The rules governing federal, state and local income taxation of annuity products—such as withdrawals, surrenders, death benefits and monthly income from immediate annuities—affect how much of an annuity product’s gain the policyholder keeps,” says Jeffrey K. Dellinger, President at Longevity Risk Management Corporation in Fort Wayne, IN.
While not affecting the level of charges embedded in annuity products, government actions have an equivalent effect. “After-tax return for an annuity policyholder is governed by fees and charges embedded in the product—some of which are the result of governmental actions—and income tax rules and rates—which are directly the result of governmental actions,” Dellinger says.
Future government actions can also affect annuity fees and charges.
“For example, a proposed ‘financial transaction tax’—a proposed tax on buying and selling a stock, bond or other financial contract like options and derivatives would impact annuities and their underlying investments. “In that scenario, the tax would raise the cost of trades that a fund makes for its portfolio and would depress fund returns; i.e., the ultimate effect is that it would serve as a new charge to annuity policyholders,” Dellinger adds.
How Government Regulation Indirectly Influences Annuity Fees
While insurance companies establish their annuity costs and fees that fall with the approval of federal and state government regulatory bodies, those same entities still indirectly impact product price tags.
“The government does influence annuity fees, but it’s more about regulation than directly setting limits,” Lee says. “For example, insurance companies must disclose fee structures upfront. However, the fees themselves aren’t capped. Instead, states make sure the fees aren’t hidden or deceptive. If an insurer overcharges, they can face fines, but it’s often up to regulators to investigate these cases.”
Regulatory-wise, state and federal government agencies split the workload on critical operational and cost issues.
“Government regulation impacts annuities by overseeing transparency and suitability standards, rather than directly controlling fees,” says Justin Haywood, president & co-founder at Haywood Wealth Management in Houston, TX. “For example, state insurance departments review annuity contracts to ensure fees are not excessive but do not set hard limits.”
Federal regulations through FINRA and the SEC, particularly for variable annuities, ensure that fees are disclosed properly to consumers. “The DOL fiduciary rule, though currently limited, emphasizes that financial professionals act in the best interest of clients, pushing for greater transparency around fees,” Haywood adds.
The Takeaway on the Government’s Impact on Annuity Fees
Annuity fees cover a range of services, such as administrative costs, investment management and guarantees like lifetime income. Above all, these fees help companies ensure the long-term sustainability of their products.
“If an annuity holder feels they’re being overcharged, they can file a complaint with their state’s insurance department,” Lee says. “Furthermore, it’s important to read the fine print on the annuity contract and ask questions before signing.”
As for whether the industry charges the right amount in fees, that’s up for debate.
“Some argue the fees are justified due to the guarantees provided, while others believe the government should step in more aggressively,” Lee notes. “ In my view, transparency is key to ensuring people fully understand what they’re paying for, which is the most important role regulators can play.”
Working with a trusted money manager can help curb annuity fees.
“I believe annuity fees are appropriate for the value they provide, especially when used correctly in retirement planning,” Haywood says. “However, it’s essential that annuities are recommended by a fiduciary who can ensure the product aligns with the client’s broader financial plan.”
“That said, more stringent oversight on fee transparency could benefit consumers, especially those unfamiliar with complex financial products,” he adds.
Editor Norah Layne contributed to this article.