FAQ – 403(b)/457 Costs and Surrender fees

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If I'm in an annuity with surrender charges in my 403(b) and I have a "term," is that for all the money going in or from the initial opening of the account?

Generally, surrender fees are calculated from the first year of the contract (initial opening of the account), not on subsequent deposits to the same annuity. However, there are annuities that charge surrender fees based on each premium payment during the surrender period.

Let's look at two hypothetical annuities:

  • Annuity A bases its surrender period on the date of the policy. It has a seven-year surrender period starting at 7% and dropping a percentage each year. If you purchase the annuity in 2010, you are free of surrender charges by 2017.
  • Annuity B charges surrender fees based on the date of each premium payment. It also has a seven-year surrender period starting at 7% and dropping a percentage point each year. The first year's payments are free of surrender charges in 2017. However, the clock starts again with the second year's payments, so second year contributions aren't free of surrender fees until 2018, and so on. With this type of surrender schedule, you would not be completely free of surrender charges until seven years after the date of the last payment that surrender charges apply to. So, if your last premium payment is in 2017, you won't be free of surrender charges until 2024.

Be sure you investigate all charges and surrender fees involved with an annuity or any other investment. Ask for the information in writing, and be sure you understand it. Some annuity contracts have very dense and confusing language. The bottom line: If you don't understand it, don't buy it.

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