The question was: Why do variable annuity companies limit the amounts that policyowners can reallocate funds to and from the guaranteed fixed interest account in their VAs? Several of my VA customers have bumped into those limits when they try to do reallocations and they want to know why they can’t move more.
The answer is: Often, there is a limit on how much may be reallocated from the guaranteed interest account at any one time or during a year. For example, the limit may be 10% in any one year.
There also may be a limit, such as 10%, on the amount that can be reallocated to the guaranteed interest account. In fact, some annuity contracts do not allow any reallocation to guaranteed interest accounts; only new premiums may be added.
The reason for these limitations is that the issuing company has made investments, usually in corporate and government bonds and similar instruments, with maturity dates of several years or longer into the future, in order to be able to pay the promised rate of interest on the funds in the guaranteed interest account. Shorter maturities would have rates too low to earn enough to pay the promised rate.