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Annuities as an Asset Class for Fee-Based Advisors l 33 © Envestnet 2022 Finally, optional GLWB riders or enhanced death benefits require an additional ongoing charge. Rider charges end after the account is depleted, though this is the source of lifetime protections. Rider charges can be confusing because they may be charged in three different ways. The most expensive option is to have the rider charged on the annuity's benefit base. As the contract value approaches $0, this will increase the rider cost as a percentage of remaining assets and work to deplete the contract value more quickly. Two other options include charging the rider on the contract value of assets and charging the rider on a declining benefit base equal to the benefit base less cumulative guaranteed distributions. With these various fees, it is possible that total variable annuity fees could add up to more than 3 percent. This, along with surrender charges, is how variable annuities have developed a reputation as being a high-cost product. We can compare this to fixed index annuities, or fixed annuities more generally. FIAs with living benefits do not require market risk management since principal is protected and the general account of the insurance company is designed with asset-liability matching. Only longevity risk must be managed with the rider fees. FIAs also differ from VAs in that, as with an income annuity, FIA fees tend to be structured internally to the product such that there are no observable fees to reduce the contract value. Fees can be kept internal because they are based on a spread between what the insurer earns on the assets and what it pays out. The insurance company earns more from investing the premiums than it pays to the owner. As with income annuities, it is also possible to reverse engineer and estimate the internal costs and "money's worth" for an FIA. This process does get more complicated because financial derivatives are being used behind the scenes to provide exposure to market upside. Internal fees are reflected through the limits placed on the upside growth potential. Of course, upside growth potential must be limited to support the downside risk protections. The internal fees for the FIA just mean that upside growth potential is less than it could have been if the insurance company did not need to cover its expenses and profit needs. At the same time, though, households may not be able to earn the same rates of returns on their funds as an insurance company that obtains institutional pricing on trades, improved diversification, and longer-term investment holding periods. The living benefit also provides risk pooling and mortality credits. It is not always the case that households could easily replicate on their own what the FIA provides as an accumulation tool even before adding the longevity protection. FIAs do not have subaccount charges or mortality and expense charges. The exceptions to the lack of external fees include that FIAs may still have a surrender charge schedule in the early years for excess distributions. This is done to allow the insurance company to invest the premium in longer-term assets and to cover the company's fixed expenses for providing the annuity. These surrender charges will gradually disappear for long-term owners. As well, any optional lifetime income benefits or enhanced death benefits added to the contract have observable fees that will be deducted from the contract value. Though otherwise protected, the contract value of the FIA could decline on a net basis after accounting for optional rider fees.

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