What fees do I pay if my 401(k) rollover goes into an annuity?

By Kaz · Published 6 October 2026 · How this site checks figures

Summary

In the SEC's examples of a variable annuity, you pay a mortality and expense risk charge of 1.25% a year and administrative fees of 0.15% a year, which is 1.40% of the account before the underlying funds charge their own expenses and before any optional riders. Leaving early costs a surrender charge, 7% in the first year in the SEC's example, falling one point a year. Inside an IRA you get nothing extra for those charges on the tax side: the SEC says an annuity held in an IRA or 401(k) gives "no additional tax advantage," and FINRA says the same. Whatever the annuity offers has to come from its insurance features.

The surrender schedule on a $250,000 rollover

The SEC's guide Variable Annuities: What You Should Know describes a typical schedule as "a 7% charge" in the first year, "6% in the second year, 5% in the third year, and so on," ending after six to eight years and sometimes ten. Applied to a $250,000 rollover with no growth, as an example:

Surrender in year	Charge	On $250,000
1	7%	$17,500
2	6%	$15,000
3	5%	$12,500
4	4%	$10,000
5	3%	$7,500
6	2%	$5,000
7	1%	$2,500
8	0%	$0

Many contracts let you take part of the value each year without a charge. In the SEC's example that's 10%: a $5,000 withdrawal in year one from a $10,000 contract pays 7% on $4,000, or $280. On $250,000, the same 10% is $25,000, so a full surrender in year one would be charged 7% on $225,000, or $15,750, if the contract applies the free amount to a full surrender, and $17,500 if it does not. Which of the two applies is a contract term written in the prospectus.

The schedule restarts, too. If you later exchange one annuity for another, the SEC's guide says "a new surrender charge period generally begins when you exchange into the new annuity."

What it costs every year

The annual charges are the bigger number over time. Investor.gov gives 1.25% a year as an example M&E charge and puts administrative fees charged as a percentage "typically in the range of 0.15% per year"; some contracts charge a flat maintenance fee instead, which Investor.gov puts at perhaps $25 or $50 a year. The SEC's guide works the M&E charge on the average account value for the year: $20,000 at 1.25% is $250.

Example, first year on $250,000:

Charge	Rate	Dollars
Mortality and expense risk	1.25%	$3,125
Administrative	0.15%	$375
Underlying fund expenses	From each fund's prospectus	Not known until you see it
Optional riders (living or death benefits)	Per rider	Extra, by the SEC's description
Before funds and riders	1.40%	$3,500

The same $250,000 in an IRA index fund with a 0.05% expense ratio would cost $125 that year. What a 0.50% expense ratio costs against 0.03% shows how a gap like this compounds over 25 years.

Bonus credits

Some contracts add a bonus credit, which Investor.gov says typically ranges from 1% to 5% of purchase payments, which can look like the 1% rollover matches some brokers pay. The SEC's guide puts $10,000 into each of two contracts for ten years at a 10% return before charges: one with a 4% bonus and 1.75% in annual charges grows to $22,978, and one with no bonus and 1.25% in charges grows to $23,136. The arithmetic is $10,400 × 1.0825^10 against $10,000 × 1.0875^10. The guide also says the insurer may "take back all bonus payments made to you within the prior year or some other specified period" after a withdrawal, a death benefit payment or in other circumstances.

Who is being paid

Investor.gov says contract fees "may go towards your financial professional's compensation," and the SEC's guide says surrender charges are used to pay the professional a commission. What a financial advisor charges for a rollover covers commission pay alongside fee-only arrangements.

FINRA Rule 2330 governs brokers who recommend deferred variable annuities. Before recommending one, the broker must have a reasonable basis to believe you were told about the surrender charges, the M&E fees and the riders, and that you "would benefit from certain features of deferred variable annuities, such as tax-deferred growth, annuitization, or a death or living benefit." In an IRA the first feature on that list adds nothing the IRA does not already give, which leaves annuitization and the death or living benefits as the features a recommendation can rest on. The rule also asks the firm to look at whether you've exchanged an annuity "within the preceding 36 months."

If you've already signed, the free-look period lets you cancel without a surrender charge; Investor.gov and FINRA both put it at 10 to 30 days, with the state setting the length. Investor.gov says the refund of purchase payments may be adjusted up or down for investment performance. For the other places a rollover can go, comparing rollover IRA providers starts from fees, and the fee calculator can show 1.40% against 0.05% on your balance.

Sources

Written by Kaz, an independent publisher.
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