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Have You Truly Considered the Effect of Rider Charges on a Fixed or Indexed Annuity?

August 1, 2011 by Sheryl J. Moore

“Zero is my hero!”

The words that captured my heart. As a young saver who had lost more than a year’s salary in my 401(k), the promise of earning no interest sounded pretty darn good. Sure the ability to outpace the interest on CDs and other fixed interest retirement products was appealing to me, but suffering the losses of the dot com bubble’s burst had soured me. I just couldn’t justify taking additional risk with my retirement dollars by keeping it in my newly-acquired “201(k).” It was then, in my search for a safe money alternative, that I met the love of my life: indexed annuities.

At the time, the product offered a strong value proposition. I could purchase an indexed annuity for my retirement and earn interest based on the market’s growth; as much as 12% or more in a single year! I realized that I couldn’t take advantage of the full increase in the market with indexed annuities; I knew that the market-linked gains were limited. However, the real clincher for me was the promise that “regardless of the market’s performance, my retirement fund’s value would never be less than the previous year.” Never less? That is right- indexed annuities promised zero percent interest as the worst-case scenario. It was a match made in heaven.

And just as indexed annuities and I were passing the “seven-year itch,” my heart broke.

In 2006, the indexed annuity market changed forever. It was at this time that the introduction of optional riders/benefits changed fixed and indexed annuity landscapes. This pivotal moment marked the occasion when the first Guaranteed Minimum Death Benefit (GMDB) was introduced on an indexed annuity, in exchange for an annual fee. Neither the fixed or indexed variety of annuities had previously offered such a feature; yet riders with fees were commonplace in the Variable Annuity market. Then again, with average annual fees on VAs exceeding 4.50%, tacking-on another benefit for a fee was not that noteworthy on this risk-based type of annuity. Take a product with principal protection, on the other hand, and introduce a VA-like feature, now THAT is a game changer. In fact, GMDBs permanently altered the insurance agent’s communication of the indexed annuity product. No longer could one assert that “worst case scenario, your retirement fund’s value will be the same that it was last year.” No. Now, you actually could lose money in an indexed annuity- even if the client did not cash surrender the contract. And GMDBs were just the beginning…with the introduction of Guaranteed Lifetime Withdrawal Benefits (GLWBs) shortly thereafter, fees for optional benefits become commonplace on both indexed and fixed annuities.

Consider: today nearly 60% of all indexed annuity sales have an optional GLWB elected on the contract. The vast majority of these riders charge an annual fee in exchange for the benefit. Did you, as an agent selling these benefits, realize that you can no longer say that your client’s annuities will never decline in value, as long as they don’t take withdrawals? You should.

Let me thicken the plot. Did you realize that an indexed annuity with an optional fee-based GLWB or GMDB doesn’t offer a “guaranteed return of principal” much less a “guaranteed return of principal, plus interest?” That’s right. With less than five exceptions, every one of these riders can eat into the principal on the contract. So, if the S&P 500 were to decline every year of the surrender charge period, your clients will still be paying a charge for that rider, and that means that they will get back less than what they paid in, if they decide to cash surrender the contract. Did you know that? I hope so.

Let’s complicate the issue even further. What if the product that you are selling has rider fees that can not only invade the principal of the annuity, but can also eat into the Guaranteed Minimum Surrender Value (GMSV) on the contract? You know- that value that essentially says that in order to be compliant with the National Association of Insurance Commissioner’s Standard Non-Forfeiture Laws (SNFL), the policyholder must never receive less than 1.00% interest on 87.50% of the premiums paid??? How could an insurance company offer such a product, if it isn’t compliant with the SNFL, you ask? You got me. Yet, there is such an indexed annuity that is available for sale today. I hope you know it if you are selling it to your clients today.

Let me continue to play devil’s advocate here. With the recent ramp-up in GMDB product development, this particular issue comes to the forefront of my mind. We are now able to create a “cafeteria plan” type of retirement product with indexed annuities. Need a rider offering higher caps? Here you go. And an enhanced death benefit with your order? Sure- we’ve got those too. How about a side of GLWB to go with that? You bet. That will be a total of 2.50% of your annuity’s account value annually, please. Do you prefer paper or plastic? You get the idea… But this is a FIXED ANNUITY, folks- not a VA!

Now, I’ve always told agents that if they are going to sell a GLWB or a GMDB on the contract, that they need to allocate at least a little of the policyholder’s premiums to the fixed bucket of the indexed annuity. This helps avoid that uncomfortable conversation about why the annuity’s value is less than the previous year, when the S&P 500 has experienced a downturn. Considering that fixed rates are normally in the 2.00% range, and rider charges typically didn’t exceed 0.75%, this little workaround allowed us to forego that uncomfortable conversation.

But what if the total fees for all of the annuity’s optional benefits EXCEEDS the rate on the fixed bucket? Now there’s something to think about…and you should. Because total fees on optional indexed annuity riders today can exceed 2.50% annually. Yet, I have fixed buckets crediting as low as 1.00%.

Listen folks. I love GLWBs- I developed the dang things. And I’ve got nothing against providing enhanced death benefits on annuities, for those that cannot obtain life insurance. However, everyone needs to get more educated on this issue. You may be able to sell the sizzle of the rollup on that income or death benefit rider, but can you pass the test when it comes time to explain the ramifications for your client electing it?

You need to. Get educated and ensure that you understand the products you are selling. sjm

Originally Posted on August 1, 2011 by Sheryl J. Moore.

Categories: Sheryl's Blogs
  • CGM

    Good article. In 2006 when the GMDB was introduced, the concept of reducing the pricipal was not with the fee was not. That occured when GLIBs hit the market. There is a solution to all of this, don’t “sell” anything. Do your diligence as a fiduciary and the right solution will present itself.

    • http://sheryljmoore.com Sheryl J. Moore


      When I developed GLWBs, it never occurred to me to let the charge invade the principal. Yet once the idea hit the street, companies were free to “innovate.” sjm

  • Brian Singer

    Great article Sheryl! All valid points that are too often overlooked. I too love GLWBs, but most income planning solutions today require the right combination of FIA’s and GLWBs for the income and principal protected portion of the balance sheet. It’s still the process first, and then use the right tool. The right combination of FIAs and GLWBs will create a sustainable structural advantage for the retiree’s portfolio.
    Thanks for your work and advocacy for these great financial tools!

    • http://sheryljmoore.com Sheryl J. Moore

      Thanks for your kudos! Wish I had a “like” button on here! sjm

  • Bob Coon


    Good to see you pointing out some potential pitfalls of annuities or at least of how some of them are sold. Probably too many are sold with benefits that have a cost which in all likelihood will never be realized. Too much of this makes us vulnerable to those who would like to see the baby thrown out with the bath water. Thanks for your work and more importantly, thanks for “keeping it real”!

    Bob Coon

  • Ric Schilling

    You are so darn smart. I just love you girl. Good call and will most definitely take your info to the bank/insurer.

    • http://sheryljmoore.com Sheryl J. Moore

      *like* :) sjm