One of the biggest draws advisors use to get you to take the plunge is the promise of the big bonus. They’ll pay you 6%, 8% or even 10% extra, right up front, just for putting your money into their variable annuity. Sounds great, doesn’t it? Who wouldn’t want such a big boost to their nest egg, especially with the stock market returns of late? But remember, there’s no such thing as a free lunch.

In return for this lovely bonus, you end up paying higher recurring annual fees, usually .15% higher (or more) than regular variable annuities. These fees are charged on all of the money in the annuity and are a continued drag on performance. Surrender penalties are higher and longer, too. The truth is that when you take into account the increased fees and the extra years you have to stay in the annuity, you really aren’t getting a ‘bonus’ at all!

These bonuses aren’t just used to entice you to invest your original IRA rollover when you retire. They’re also used to encourage you to transfer out of an annuity you already own that’s still in the penalty period. Advisors will tell you that the bonus on this ‘new-and-improved’ annuity will ‘pay you back’ for the penalty you’ll pay to get out of your old commission-based investment. The truth is, by getting you to switch to the ‘bonus’ annuity, they earn a fat fee up-front. You end up with pretty much the same thing you had but now are locked into it for much longer. What kind of a ‘deal’ is that? The promise of multiple investment choices is another feature of the variable annuity sales pitch that doesn’t live up to its claim. It’s true that many variable annuities offer a multitude of mutual fund choices in various sub-accounts, including funds investing in bonds, small companies, large companies, international stocks and more. Surely out of all of these choices, anyone could create a balanced well-performing portfolio, right?

Not necessarily. It’s sort of like fishing. Who wants to fish in a pond full of minnows? Wouldn’t you rather drop your line where you have a greater chance of catching the big one? The mutual fund universe is full of thousands of choices. But only a small group of them are consistent top performers. Unfortunately, few variable annuities offer these big fish.

Some variable annuities feature a well-known fund already offered to the general public. But beware. This same fund will have much higher management fees within the annuity than it does outside of it, hampering its performance. I believe insurance companies make special deals with mutual fund companies to gain access to their management and then charge higher fees.

When you invest your money into a variable annuity, you’ll no longer have control over the choices at your disposal. The insurance company can change the investment choices whenever they want to and you have no recourse. Since your money is locked in for years, it will be very costly to change course a few years down the road should you be dissatisfied. What kind of choice is that?

So here’s the bottom line: variable annuities make big promises but don’t really deliver. Every feature they offer -- be it a big bonus, a multitude of investment choices, death benefit, or a guaranteed income stream -- comes at a very high price. High management fees and long, costly surrender penalties hinder your performance and rob you of your flexibility and control. The ones making the most money off of variable annuities are the advisors and the insurance companies. It turns out that variable annuities are a great investment—for them.

If you’d like free, clear, unbiased advice submit your questions to http://www.guardingyourwealth.com/askjeff.htm. Also, see answers to questions other readers have asked onthe Q&A page at http://www.guardingyourwealth.com.

Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached at jeff@guardingyourwealth.com

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at http://www.guardingyourwealth.com