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Variable Annuity Study Finds No Fees for Most Partial Withdrawals, Cash-Outs

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Just-released research by the American Council of Life Insurers found that the majority of variable annuity account holders who either take a partial withdrawal or cash in their VAs entirely face no fee on the transaction.

The study, conducted by NERA Economic Consulting on behalf of ACLI, found that for full surrender of contracts, the average fee paid is 1.5%, while partial surrender of VA contracts results in an average fee of 0.4%.

At least 10 of the 13 firms that participated in the study offer VA contracts that include no surrender charges, while all of the 13 firms in the sample that offer policies with surrender charges allow contract holders to withdraw some percentage of their account balance each year with no fee, the report states.

NERA analyzed a database provided by ACLI of variable annuity contracts, including data from thirteen insurance companies representing more than 27% of 2014 variable annuity considerations and approximately 30% of 2014 variable annuity reserves.

In aggregate, the combined database contains information on contract features and charges for more than 237,000 contracts, including the amount of surrender fees, also known as contingent deferred sales charges, paid for thousands of the contracts, the study states.

Using this data, NERA measured surrender fees paid by consumers and found that “the effective surrender charges — in other words, the amounts actually paid by contract holders as opposed to the theoretical maximums listed in prospectuses — are considerably lower than the scheduled surrender fees listed in variable annuity prospectuses.”

“One data point makes it especially clear that fees on surrenders are low,” said Andrew Melnyk, ACLI’s vice president of research. In dollar terms, the report shows that “the average amount paid for a full surrender is approximately $750 on an average surrender amount of $100,000.”

The report found that the average charge on any surrender (partial or full) is 0.8%.

For full surrenders of contracts, the average surrender fee paid is 1.5% of the amount surrendered, and the median surrender fee paid is zero. In dollar terms, the average amount paid for a full surrender is approximately $753, on an average surrender amount of approximately $103,006, the report states.

The average surrender fee paid on a partial withdrawal is even lower, at 0.4% of the amount withdrawn.

Of the accounts studied with surrenders, approximately 23,000, or 70%, are IRA accounts, the report notes.

For IRA variable annuities, the average surrender fee paid on any partial withdrawal or full surrender is even lower, at 0.6% (less than 1%, or six-tenths of 1%) of the amount surrendered.

Also, 78.6% of withdrawals in IRA accounts paid 0% in fees.

The report also found that most holders own their VAs for long periods, which is their intended purpose.

“Life insurers design variable annuities to be held for long-term retirement planning purposes,” Melnyk said. “This survey shows they are largely being used for their intended purpose,” he said, adding that said VA surrender charges typically “decrease annually, often starting at 7% of the accumulated value of the contract in the first year and vanishing to zero in the seventh year.”

Among those contract owners who do pay a fee, the average is less than 1%, Melnyk said, adding that more than 18 million variable annuities are in force today.

— Check out Evensky: Fee-Only Advisors Face Annuity Dilemma on ThinkAdvisor.