Q&A: Indexed Annuity Lies

Q:

On Saturday and Sunday most of the money programs are recommending indexed annuities and boast low fees less than 1% that earn 5+%. educate me please.
-Sam

A: 

This is a perfect example of why I hate 99+% of the "investing" programs on the radio today; they LIE! There is no sugar-coating it. Claiming a return in excess of 5% is not the lie. Those kind of returns are possible (now, if they claimed a safe 5%+, that would be a lie).

Total fees of less than 1%? On a indexed annuity? Ha! To even imagine such a product existing stretches credulity. For one of these infomercial hucksters to offer one is truly impossible. Let's break it down:

Even if they use index funds, the investment expense would have to be, at least, 0.2%.

Then, to make this an annuity, there must be an insurance component. Even a simple variable annuity (that only guarantees return of your principal should you die) has average insurance fees (mortality and expense or M&E) of between 1% and 1.25% annually (depending on who is doing the math).

Then, to guarantee a minimum 5% annual return, a typical annuity will charge another 1% to 1.25%.

Annual fees of less than 2% are unlikely. Less than 1% per year is impossible. 

I haven't even begun to discuss the big commission paid to the salesperson promoting the annuity. These can be as high as 10% of the initial investment, plus an annual trailer of 0.25% or more.

Since the commission is paid to the agent immediately, the insurance company must have a way to guarantee searing if back from their high fees. This means there will be a surrender charge. These charges vary, but will typically be 7% to 10% if you take money out during the first seven to 10 years.

I'd be willing to bet that none of these "hosts" mentioned any of this on their "shows."
-Don