High expenses or fees are one criticism I have heard regarding annuities. Can you explain the fee structure around annuities?

Annuities are products that combine insurance and, in the case of variable annuities, asset management.  Costs are absolutely critical, so definitely ask you financial advisor to spell-out the costs for each of the items discussed below.

The fees or expenses associated with annuities can differ widely among different companies and different product types.  At the most general level, fees depend upon whether the product is a fixed annuity or a variable annuity

Fixed annuities generally do impose direct expenses on the contract holder.  That said, surrender charges (applied if a contract is cancelled within the initial several years) do come into play with certain types of fixed annuities.  Surrender charges are typically around 5% - 7% of the annuity contract value, and they will decrease to zero over a certain period of time such as 5 - 7 years.

Variable annuities have: 1) investment management fees, and; 2) insurance charges. Investment management fees compensate the managers of the mutual funds or investment options that are available.  Fees are based upon "assets under management" and might range, for example, from 50 basis points to 1.5%.  So, if you have $100,000 that is fully invested in mutual funds and the asset management fee is 1% you would be paying $1,000 per year to the asset manager.  Asset management fees are not unique to variable annuities, all fund managers charge some form of fee.  For comparison, though, a passively managed index fund such as those run by Vanguard might charge as little as 20 basis points per year (that would be $200 per year on that $100,000).

Insurance charges include: 1) sales charges; 2) administrative charges, and; 3) mortality and expense risk (M&E fees) charges.  Sales and administrative charges cover the costs of establishing and maintaining the annuity contract.  Some insurers may have an annual contract maintenance fee in the range of $50.

The mortality and expense risk charges (M&E fees) pay for the insurance features.  This would include the income guarantees, and living benefits, death benefits, etc.  This is important stuff--it's why annuities can be so powerful and where people get the bang for their buck.

Surrender fees--which were discussed briefly above--also come into play with variable annuities.  Ask questions about surrender fees up front!  Last, some states impose premium taxes on variable annuity purchases that can range from 1% - 4%.

Variable annuity sales charges depend on the share class of the annuity.  This is super important as well, so ask about share classes and sales charges up front.  The various share classes are as follows:

1) B-Share variable annuities - no initial sales charge but surrender fees do apply.  The majority (@ 40%) of variable annuities are B-share.

2) A-Share variable annuities - these do have front-end sales charges but no surrender fees.

3) C-Share variable annuities - no front-end sales charges or surrender fees.  Costs, however, may ultimately be built into the M&E fees.

4) L-Share variable annuities - no front-end sales charges and relatively small surrender fees.  Again, M&E fees may be higher as a result.

5) X-Share variable annuities - credit an amount to the contract value before at the the time that the annuity contract is issued.