Retirement products are often compared with one headline number: the fee. That can be useful, but it can also be misleading because different fees pay for different things and are charged in different ways.

An investment adviser may charge an ongoing percentage of assets under management, commonly called an AUM fee. A retirement account may also contain fund expenses and plan-administration costs. An annuity may have surrender charges, optional rider costs, contract fees or, in a variable annuity, investment and insurance expenses.

The right comparison is not “which one has a fee?” Almost everything has a cost. The better question is: What am I paying, how long do I pay it, what do I receive in return, and what happens if I leave?

How an AUM fee works

The SEC’s Investor.gov explains that asset-based advisory fees are typically stated as an annual percentage of the assets being managed. If your account grows, the dollar amount of the fee generally grows too. If it falls, the dollar fee generally falls.

For example, a 1% AUM fee on $500,000 is $5,000 for that year before considering any underlying fund expenses or other account costs. On $1 million, the same percentage is $10,000.

That does not mean a 1% advisory relationship is automatically expensive or inappropriate. The value depends on the services actually being delivered: portfolio management, financial planning, tax coordination, retirement-income planning, behavioral coaching and other work may all be part of the relationship. But the dollar cost should be understood.

Investor.gov’s fee bulletin shows why recurring fees matter over long periods: fees reduce the amount of money that remains invested and compounding.

What can sit underneath the advisory fee?

An AUM fee may not be the only investment cost. Mutual funds and ETFs can have expense ratios. Workplace retirement plans can have administrative costs. Transaction charges or other fees may also apply depending on the account.

The Department of Labor notes that 401(k) investment-management fees are commonly deducted directly from investment returns, and administrative expenses may also be charged to participants. The net return you see is after those deductions.

Annuity costs work differently

There is no single “annuity fee.” Costs depend heavily on the type of annuity and the specific contract.

Fixed and fixed indexed annuities may have surrender charges for taking more than the contract’s free-withdrawal amount during the surrender period. Some contracts have market value adjustments. Optional income or long-term-care-related riders may have an additional charge. The National Association of Insurance Commissioners advises consumers to review contract fees, surrender charges, transaction charges and rider costs carefully.

Variable annuities can have substantially more ongoing charges, including mortality-and-expense charges, administrative fees, underlying fund expenses and optional-benefit fees. Investor.gov specifically warns buyers to understand these expenses before investing.

A surrender charge is not the same as a recurring AUM fee

A surrender charge is generally conditional: it applies when money is withdrawn beyond permitted amounts during a defined period. An AUM fee is generally recurring: it is charged for ongoing management while the assets remain under management.

That distinction matters. A person who holds a fixed annuity for its intended term and stays within the contract’s liquidity provisions may experience the economics of its costs very differently from someone paying an annual percentage-of-assets fee every year.

On the other hand, surrender restrictions can be a serious disadvantage if you need more liquidity than expected. Neither cost structure should be minimized.

Index limits are also economic tradeoffs

Fixed indexed annuities may credit interest using caps, participation rates or spreads. The NAIC explains that a cap can limit the maximum credited interest, a participation rate determines how much of an index increase is used, and a spread can be subtracted from index growth.

Those mechanisms are not necessarily itemized annual fees deducted from the contract value, but they can affect how much interest is credited. That is why comparing an indexed annuity only by asking “what is the fee?” can miss an important part of the economics.

The comparison should match the job

A market portfolio is designed to participate in investment markets. A fixed annuity is an insurance contract designed around guarantees, principal protection features and/or future income. A variable annuity combines investment exposure with insurance features. Comparing them solely on cost ignores what each tool is being asked to accomplish.

A useful retirement review asks:

What is the total annual dollar cost today?
Which charges are recurring and which are conditional?
Are there underlying fund or plan expenses in addition to advisory fees?
What liquidity is available without penalty?
What guarantees or insurance benefits are being purchased?
What opportunity cost comes from caps, participation rates or other crediting limits?
How long do you realistically expect to keep the strategy?

Ask for the costs in dollars, not just percentages

Percentages are easy to overlook. Ask what you paid last year in actual dollars, what you are projected to pay over time, and what services or guarantees those dollars purchase.

King Life can help compare retirement-income strategies side by side, including liquidity, guarantees, market exposure and disclosed costs.

Request a Retirement Income Review

Educational information only. Annuities are insurance products. Fees, surrender schedules, crediting methods, guarantees and rider costs vary by contract. Guarantees are subject to the claims-paying ability of the issuing insurer. Investment products involve risk and may lose value.