Meet Jennifer, a 52-year-old public relations executive who was recently sold an annuity by an insurance salesman. At first, the annuity seemed like a safe and appealing option to guarantee income for her retirement. But after doing some research, Jennifer has started to realize that the fees attached to her annuity are much higher than she initially understood. Now, she’s feeling regretful and unsure about what to do. Should she stick with the annuity, or is there a way to unwind this decision and make better financial choices moving forward?

Jennifer’s situation is not uncommon. Annuities are often marketed as secure investment vehicles, especially to those nearing retirement, but they come with complicated fee structures, which can eat away at returns. Here’s what Jennifer—and others in similar situations—can do to manage this type of financial misstep and how to avoid it in the future.

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1. Understand the Annuity Fees and Penalties

Before making any decisions, Jennifer needs to fully understand the fee structure of her annuity. Annuities often come with various fees, including:

• Surrender Charges: These are penalties imposed if Jennifer withdraws from or cancels the annuity within a certain time frame, often between 7 to 10 years. These charges can be as high as 7% to 10% of the annuity’s value, gradually decreasing over time.
• Administrative Fees: Some annuities have administrative fees for managing the account, which can be 0.3% to 0.5% annually.
• Mortality and Expense Risk Fees (M&E): These fees compensate the insurance company for risks they take on, typically ranging from 1% to 1.5% of the annuity’s value per year.
• Investment Management Fees: If Jennifer’s annuity includes a variable component, there may be additional fees tied to the underlying investments, often around 0.5% to 1%.

The key for Jennifer is to understand how much she’s truly paying in fees and how those fees affect her potential returns.

2. Evaluate Whether to Stay or Exit

Once Jennifer understands the financial impact of her annuity’s fees, she’ll need to decide whether it’s worth holding on to the annuity or if she should consider exiting. Here are some things to weigh:

• Length of Time Held: If Jennifer is still in the early years of her annuity, she might face significant surrender charges if she cancels the contract now. However, if she’s closer to the end of the surrender period, the penalties may be lower.
• Current Performance: Jennifer should also evaluate the annuity’s performance. Are the returns strong enough to justify the fees? If not, she may be better off investing in a more transparent, lower-cost product like an IRA or a brokerage account.
• Living Benefits: Some annuities offer valuable riders, such as guaranteed lifetime income or long-term care benefits. If Jennifer’s annuity includes these features and she expects to need them, it might be worth keeping the annuity despite the fees.

3. Explore Exchange Options

If Jennifer decides that her annuity’s fees are too high, one potential option is to do a 1035 exchange, which allows her to transfer the money from one annuity into another without triggering taxes. By moving her funds into a lower-fee annuity or a product better suited to her financial goals, Jennifer might avoid penalties and still maintain a tax-advantaged position.

However, Jennifer must be careful. Not all annuities are created equal, and some replacement products might have hidden fees or surrender charges. She should consult with a financial advisor before making this move.

4. Consult a Financial Advisor

Navigating complex financial products like annuities can be overwhelming, which is why Jennifer would benefit from seeking advice from a fiduciary financial advisor. Unlike the insurance salesman who sold her the annuity, fiduciary advisors are legally obligated to act in her best interest. They can help Jennifer determine whether her current annuity aligns with her goals and suggest alternatives if necessary.

When searching for a financial advisor, Jennifer should follow these guidelines:

• Ensure They’re a Fiduciary: Fiduciary advisors are bound by law to put their clients’ interests first. This can help Jennifer avoid biased recommendations based on commissions.
• Check Credentials: Look for advisors with certifications like Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA). These designations indicate a high level of education, training, and ethics.
• Understand Their Fee Structure: Jennifer should seek advisors who charge flat fees or hourly rates rather than commissions. This ensures that the advice she receives isn’t influenced by financial incentives.

5. Use Tools to Find the Right Advisor

Jennifer can use platforms like SmartAsset to find an advisor who fits her needs. SmartAsset’s tool matches users with local fiduciary financial advisors based on their financial situation and goals, allowing Jennifer to compare options and select the one she feels most comfortable with. By choosing an advisor through such a platform, Jennifer can gain peace of mind knowing that the advisor will prioritize her best interests, unlike the salesperson who originally sold her the annuity.

There’s Still Hope

Jennifer’s regret over purchasing a high-fee annuity is understandable, but she still has options to rectify her situation. By understanding the costs associated with her annuity, considering an exit strategy, and seeking guidance from a fiduciary financial advisor, Jennifer can make informed decisions that will put her back on the right path. Going forward, it’s crucial that she—and others like her—work with advisors who are truly committed to their financial well-being. Tools like SmartAsset can help ensure that she finds an advisor who will provide unbiased, expert advice tailored to her long-term goals.

What Would You Do If You Were Jennifer? Tell Us in the Comments!

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