If a financial advisor or broker sold you a variable annuity — especially inside an IRA or other retirement account — you may have paid far more than you realized. Variable annuities routinely carry total annual costs of 2.5% to 3.5% or more, distributed across multiple fee layers that are rarely explained at the point of sale. On a $500,000 account, that fee drag can cost you hundreds of thousands of dollars over a 20-year retirement — money that compounds in the insurance company’s pocket rather than yours.
Worse, for retirees who hold a variable annuity inside an IRA, the product’s primary selling point — tax-deferred growth — is entirely redundant. The IRA already provides that benefit. The SEC has stated this plainly. FINRA has warned brokers about it for decades. And yet the unsuitable sales continue, because the commissions are too large and the oversight too inconsistent.
This article explains how variable annuities work, how their fees erode retirement savings, what regulatory obligations brokers must meet before recommending them, and what recent enforcement actions reveal about industry conduct. If you believe you were sold a variable annuity that was not in your best interest, an experienced investment fraud attorney can help you evaluate your options.
What Is a Variable Annuity?
A variable annuity is a contract between you and an insurance company that functions simultaneously as an investment account and an insurance product. It has two distinct phases.
The Accumulation Phase
During accumulation, you make one or more purchase payments that are allocated among a menu of subaccounts — investment options inside the annuity that function like mutual fund clones. Your account value rises and falls with the market performance of those subaccounts, meaning you bear the full investment risk. There is no floor on how much you can lose. Some contracts also offer a fixed-rate account option, but the defining feature of a variable annuity is market exposure.
The Payout (Annuitization) Phase
At some point — either voluntarily or at a contractually mandated age, sometimes as early as age 95 — the contract can be converted into a stream of income payments. Once annuitized, withdrawals outside the scheduled payment stream are generally prohibited. Most investors, however, never annuitize; they treat the product as an investment account and take periodic withdrawals.
Who Issues and Who Sells Variable Annuities
Variable annuities are issued by insurance companies — major issuers include Lincoln National, Jackson National, Allianz, Nationwide, AXA/Equitable, MetLife, Prudential, Brighthouse Financial, Pacific Life, and Transamerica. They are sold by broker-dealers and registered representatives through retail distribution firms. Because they are securities, only registered brokers with appropriate licenses may sell them.
The Dual Regulatory Classification
Variable annuities occupy an unusual legal position: they are both SEC-registered securities and state-regulated insurance products. The U.S. Supreme Court established this in SEC v. Variable Annuity Life Insurance Co., 359 U.S. 65 (1959), holding that a contract whose investment returns are not guaranteed by the issuer is a security, not merely insurance. This means variable annuity issuers must register under the Securities Act of 1933 and the Investment Company Act of 1940, and the brokers who sell them are supervised by FINRA under the Securities Exchange Act of 1934. State insurance regulators provide an additional — but not always adequate — layer of oversight.
The Problem With Variable Annuities Inside IRAs
The single most common complaint regulators hear about variable annuity sales is also the most straightforward: selling a variable annuity inside an IRA or other tax-deferred retirement account makes no economic sense for the investor.
The primary benefit brokers use to justify a variable annuity recommendation is tax deferral — earnings inside the annuity grow without being taxed until withdrawn. But an IRA already provides exactly that benefit. Placing a variable annuity inside an IRA means you are paying a steep premium — in the form of M&E charges, administrative fees, and rider costs — for a tax benefit you would receive for free through the IRA alone.
“If you are investing in a variable annuity through a tax-advantaged retirement plan, you will get no additional tax advantage from the variable annuity. Consider whether other tax-advantaged investments might be more appropriate for your situation.” — SEC Office of Investor Education and Advocacy
FINRA is equally direct. FINRA Regulatory Notice 07-53 states that a variable annuity inside an IRA “does not provide any additional tax deferred treatment of earnings beyond the treatment provided by the IRA itself,” and that firms must ensure “features other than tax deferral” make the purchase appropriate. FINRA Rule 2330(b)(1)(A)(ii) codifies this: before recommending a variable annuity, a broker must have a reasonable basis to believe the specific customer would benefit from features such as tax-deferred growth, annuitization, or a death or living benefit.
When the annuity is inside an IRA, the tax-deferral justification evaporates entirely. A broker who recommends a commission-laden variable annuity to a retiree without identifying a compelling alternative justification has likely made an unsuitable recommendation — and may have violated FINRA rules, Regulation Best Interest, or both.
The Fee Structure: Six Layers Working Against You
Variable annuity costs are spread across six distinct fee layers. None of them appear in a single, aggregated line item. According to the IBF Financial Knowledge Center, which analyzed 26,547 unique variable annuity policies over five years, the total annual charge for a typical contract with a living benefit rider averages approximately 3.3% of account value per year — compared to 0.07%–0.34% for comparable index fund or ETF alternatives. NASAA has warned that fees in annuity contracts are “often buried in the fine print.”
| Fee Layer | Typical Annual Range | What It Pays For / Key Concern |
| Mortality & Expense (M&E) | 1.00% – 1.50% | Covers insurer’s insurance risk; often subsidises broker commissions |
| Subaccount Expenses | 0.50% – 1.50% | Internal fund costs; 3x–15x more expensive than comparable ETFs/mutual funds |
| Administrative Fee | 0.10% – 0.30% | Flat ~$25–$50/year or % of account value; often waived above thresholds |
| Living Benefit Rider | 0.75% – 1.50%+ | GLWB averages ~1.06%; GMIB up to 1.50%; charged on benefit base, not account value |
| Death Benefit Rider | 0.25% – 0.75% | Enhanced death benefits beyond the base return-of-premium guarantee |
| TOTAL (typical B-share) | ~2.5% – 3.5%+ | Average with GLWB ~3.3%/year vs. 0.07%–0.34% for comparable index alternatives |
Layer 1: Mortality and Expense (M&E) Risk Charges
M&E charges are the insurance company’s primary revenue source from the contract, typically ranging from 1.00% to 1.50% annually of your account value on commission-based (B-share) contracts — the type most commonly sold to retail investors. The SEC acknowledges that “a portion of this fee is sometimes used to pay commissions to your financial professional.” On a $500,000 contract, M&E charges of 1.25% cost $6,250 every year. Over 20 years, with the effect of compounding, the cost difference between a 1.25% M&E charge and a fee-based alternative charging 0.25% amounts to more than $100,000 in lost wealth.
Layer 2: Subaccount Expense Ratios
On top of M&E charges, you pay the internal expense ratios of the underlying subaccounts — typically 0.50% to 1.50% annually. For context, Morningstar’s 2024 U.S. Fund Fee Study found that the asset-weighted average expense ratio across all U.S. mutual funds and ETFs was 0.34%, with passive index funds averaging just 0.11% and some Vanguard index funds as low as 0.07%. Variable annuity subaccount expenses are routinely three to fifteen times higher than what you would pay investing in equivalent mutual funds or ETFs outside an annuity wrapper.
Layer 3: Administrative Fees
Administrative fees cover the cost of maintaining the contract — recordkeeping, statements, and customer service. They are typically charged as a flat annual fee of $25 to $50 or as a percentage of account value in the range of 0.10% to 0.30%. While individually modest, they add to the cumulative fee burden and are rarely discussed at the point of sale.
Layer 4: Rider Fees — The Most Expensive Component
More than 85% of variable annuities are sold with at least one optional benefit rider, which adds a separate annual charge on top of all other fees. The most common rider is the Guaranteed Lifetime Withdrawal Benefit (GLWB), which averages approximately 1.06% per year of the “benefit base” (which can differ significantly from your actual account value). Guaranteed Minimum Income Benefit (GMIB) riders can cost up to 1.50% annually. These riders provide real benefits for some investors — but they must be weighed against their substantial costs, and they were frequently sold to retirees whose circumstances made it unlikely the guarantee would ever be triggered.
Layer 5: Enhanced Death Benefit Riders
Base variable annuity contracts include a minimum death benefit — typically a return of your original premium. Brokers often upsell enhanced death benefits (stepped-up account values, for example) for an additional 0.25% to 0.75% per year. For elderly investors with terminal illness concerns or limited beneficiary needs, these enhancements are often unnecessary add-ons that increase annual costs without commensurate benefit.
Layer 6: Surrender Charges — The Lock-In Mechanism
Surrender charges are the mechanism that traps investors once they realize the product is unsuitable. A typical schedule begins at 7% in year one and declines by approximately 1% per year until reaching zero — often after seven to ten years. During the surrender period, withdrawing more than the typical free-withdrawal allowance (usually 10% per year) triggers these penalties. FINRA notes surrender periods of eight years or more are common. For a retiree who invested $500,000 in year one, surrendering in year two could cost $30,000 or more in penalties alone — on top of the ongoing fee drag.
The Total Picture: What Fees Actually Cost You
On a $500,000 variable annuity with a GLWB rider, a realistic all-in fee of 3.3% costs $16,500 in the first year alone. Compare that to a comparable index fund portfolio at 0.10%, costing $500. The annual difference is $16,000. Over 20 years at a 6% gross return, that fee differential compounds to more than $380,000 in lost retirement wealth — the difference between a comfortable retirement and a constrained one.
How Brokers Exploit Variable Annuities: Common Misconduct Patterns
Commission-Driven Recommendations
Broker commissions on variable annuity sales typically range from 5% to 7% of the purchase amount. On a $500,000 sale, that is $25,000 to $35,000 paid upfront by the insurance company to the broker’s firm — far more than any alternative investment would generate. A broker recommending an index fund portfolio would earn ongoing advisory fees of perhaps $5,000 to $7,500 per year. The one-time commission incentive is structural, and it creates a conflict of interest that FINRA and the SEC have documented extensively. The critical question in any variable annuity case is whether the recommendation was made because it was in the client’s best interest — or because it was in the broker’s.
Selling Variable Annuities Inside IRAs
As discussed above, placing a variable annuity inside an IRA is one of the clearest red flags in this area of law. It means the investor paid premium fees for a tax benefit they already had. When a broker recommends this and cannot identify compelling alternative justifications (genuine annuitization need, unique death benefit, etc.), the recommendation is presumptively unsuitable under FINRA Rule 2330.
Misrepresentation: “Safe” and “Guaranteed”
A persistent pattern in variable annuity sales is characterizing the product as safe, guaranteed, or risk-free. This is false. The base variable annuity has no floor — account value falls with the market. Death benefit and living benefit riders provide contractual guarantees for specific scenarios, but they do not prevent account value from declining. And every guarantee is only as strong as the financial condition of the issuing insurance company. Brokers who told clients their money was “protected” or “guaranteed” without explaining these limitations may have made material misrepresentations actionable under FINRA rules and securities law.
Unsuitable Recommendations to Elderly Investors
Selling a variable annuity with a seven-to-ten-year surrender period to a 75-year-old investor is a textbook suitability failure. FINRA’s suitability rules require a broker to consider the customer’s age, time horizon, liquidity needs, and risk tolerance. Locking a retiree’s savings into an illiquid product for nearly a decade is rarely consistent with those factors. FINRA’s 2025 Annual Regulatory Oversight Report documented ongoing findings of variable annuity recommendations inconsistent with “the customer’s investment objectives and time horizon.” If you are over 65, or were when the annuity was sold, that is a critical fact in evaluating whether the recommendation was appropriate.
1035 Exchanges and Churning
A 1035 exchange allows tax-free replacement of one annuity with another. While legitimate in some circumstances, brokers sometimes recommend unnecessary exchanges — surrendering an existing annuity (often triggering surrender charges and loss of accumulated benefits) to purchase a new one, primarily to generate a new round of commissions. FINRA Rule 2330(b)(1)(B) imposes specific additional analysis requirements before recommending an exchange, including whether the customer will incur surrender charges or lose existing benefits. Brokers who cannot document a genuine customer benefit from the exchange face serious exposure. If your broker recommended replacing one annuity with another within a few years, that is a significant red flag warranting review by a FINRA arbitration attorney.
Recent Enforcement Actions: What Regulators Have Found
The following cases — all from 2023 through early 2026 — demonstrate that both the SEC and FINRA continue to actively pursue variable annuity misconduct. They also illustrate the specific patterns regulators are finding most egregious.
SEC v. Putney Financial Group / Raymond Lawrence Lent (May 2024)
SEC File No. 3-21943 | Exchange Act Release No. 34-100183
A California-based investment adviser recommended variable annuities from insurance companies that paid upfront sales commissions — when the same insurers offered the identical contracts without commissions and with lower ongoing fees. The adviser never disclosed this conflict and never analyzed whether the commission-paying versions were in clients’ best interest. The SEC found violations of Sections 206(2) and 206(4) of the Investment Advisers Act. Total sanctions: disgorgement of $707,129.58, prejudgment interest of $183,236.60, and a civil penalty of $175,000 — approximately $1.065 million in total. This case is significant because it establishes that an adviser’s failure to even consider the lower-cost, non-commission alternative is itself a fiduciary breach.
FINRA v. Arlington Securities, Inc. and Robert Earl Hillard (December 2024)
FINRA Case No. 2020065154601 | AWC Issued December 11, 2024
This case is a textbook example of commission-driven unsuitable recommendations. When a broker’s mutual fund trail commissions began declining as Class C shares automatically converted to less-expensive Class A shares, the broker recommended that 14 customers liquidate those funds and purchase higher-cost variable annuities — increasing their collective annual expenses by $67,026.47. The broker provided nearly identical written justifications for all 14 customers without considering individual circumstances. The firm’s supervisory procedures failed to detect or prevent the scheme. Sanctions: the firm was fined $50,000; the broker was fined $10,000, ordered to pay $67,026.47 in restitution plus interest, and suspended for four months beginning January 6, 2025. Violations included FINRA Rules 2010, 2111, 2330, and 3110. This case illustrates a failure of both individual suitability and firm-level supervision.
FINRA v. BBVA Securities Inc. (November 2024)
FINRA AWC | $150,000 Fine
BBVA Securities failed for more than two years (March 2019 – August 2021) to maintain any supervisory system capable of detecting suspicious rates of variable annuity exchanges that might evidence churning or unsuitable switching. The firm’s surveillance reviewed only single-month snapshots of exchange transactions and produced no alerts, no rate-based analysis, and no guidance on when a representative’s exchange activity should trigger further review. FINRA Rule 2330(d) requires exactly this kind of surveillance. The firm was fined $150,000 and censured. This case is important for clients: it confirms that a broker-dealer’s failure to supervise is itself a FINRA violation — and that investors harmed by unsupervised exchanges may have claims against the firm as well as the individual broker. For more on these claims, see our page on failure to supervise.
For more information on supervisory failure claims, visit our page on failure to supervise.
Rosenau Family Research Foundation v. Principal Securities (June 2024)
FINRA Arbitration | Award: $7,340,000 | June 5, 2024
One of the most significant variable annuity churning cases in recent years. A broker at Principal Securities invested 99% of a tax-exempt charitable foundation’s $26.4 million in variable annuities and life insurance products from multiple major insurers, including Jackson National, Lincoln, and Nationwide. Because the foundation was a tax-exempt entity, the products’ core tax-deferral benefit was entirely worthless to it. The broker then churned the portfolio — surrendering annuities and replacing them weeks later with new ones — generating approximately $3.3 million in commissions and fees while the portfolio declined from $28.3 million to $26.3 million during a bull market. A FINRA arbitration panel awarded the foundation $7,340,000 in compensatory damages. The broker was terminated by Principal in October 2019 for concerns about business practices. This case illustrates both the scale of harm possible in churning cases and the particular problem of variable annuity sales to entities — or individuals — who receive no tax benefit from the product.
SEC v. Jeffrey Cutter and Cutter Financial Group LLC (Filed 2023; Verdict 2025)
SEC Litigation Release No. 25669 | Final Judgment February 10, 2026
Although this case involves fixed indexed annuities rather than variable annuities, it is the most significant recent test of SEC authority over annuity sales by dually registered investment advisers and warrants attention. A Massachusetts adviser managing $215 million for approximately 476 retail clients — most of them retirement-age — steered clients into fixed indexed annuities paying 7%–8% upfront commissions (versus 1.5%–2% annual advisory fees), earning $9.34 million from 580 annuity transactions over eight years. A Massachusetts jury found the adviser liable for negligent breach of fiduciary duty under Section 206(2) of the Investment Advisers Act. Civil penalties totaled $150,000. The case is on appeal. Its significance is that the SEC successfully prosecuted an investment adviser for prioritizing high-commission insurance products over clients’ best interests — without proving intentional fraud.
What Your Broker Was Required to Do
FINRA Rule 2330: The Variable Annuity-Specific Rule
FINRA Rule 2330 — Members’ Responsibilities Regarding Deferred Variable Annuities — is the most specific rule governing variable annuity sales practices. It became fully effective in February 2010 and imposes obligations on both the selling representative and a reviewing principal. Under Rule 2330(b)(1), before recommending a variable annuity purchase or exchange, a broker must (1) inform the customer of all material features, including all fees, surrender charges, tax penalties, market risk, and the distinction between the insurance and investment components; (2) have a reasonable basis to believe the customer would specifically benefit from the product’s features — including tax deferral, where applicable; (3) have a reasonable basis to believe the particular product and subaccounts are suitable for the specific customer; and, for exchanges, (4) analyze whether the customer will incur surrender charges, lose existing benefits, face a new surrender period, or experience increased fees.
Rule 2330(d) separately requires firms to implement surveillance procedures capable of detecting representatives with suspicious exchange rates — the mechanism that should catch churning before it causes serious harm. The BBVA Securities case above illustrates what happens when this surveillance is absent.
Regulation Best Interest (Reg BI)
Effective June 30, 2020, the SEC’s Regulation Best Interest (17 CFR § 240.15l-1) raised the standard of conduct for broker-dealers recommending variable annuities and other securities to retail customers. Reg BI’s Care Obligation requires a broker to exercise “reasonable diligence, care, and skill” and explicitly to consider costs and reasonably available alternatives — a significant improvement over the prior suitability standard, which did not require comparing costs. Under Reg BI, a broker who recommends a 3.3%-per-year variable annuity without considering whether a 0.10%-per-year index fund would serve the client equally well has failed to meet the care obligation. The standard cannot be satisfied through disclosure alone — the broker must actually make the better recommendation, not just disclose the conflict.
NAIC Model Regulation #275: Best Interest for Annuity Sales
At the state level, the National Association of Insurance Commissioners updated its Suitability in Annuity Transactions Model Regulation in February 2020 to elevate the standard from mere suitability to a best-interest obligation. This model has now been adopted in 49 jurisdictions. Under the revised standard, an insurance producer recommending an annuity must act in the best interest of the consumer “without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest” — the same framework as Reg BI. States that have adopted the model regulation provide an additional avenue for consumer complaints and regulatory enforcement.
FINRA’s 2025 Annual Regulatory Oversight Report: Active Examination Priority
FINRA’s 2025 Annual Regulatory Oversight Report devoted a dedicated section to annuities, documenting the following specific examination findings from the prior year: firms lacking reasonable supervisory procedures for variable annuity sales; insufficient consideration of customer age and time horizon; inadequate surveillance for exchange rates suggesting churning; Reg BI Care Obligation violations where variable annuity recommendations lacked a reasonable basis; false or misleading documentation on annuity transactions; and failure to consider reasonably available lower-cost alternatives. The 2026 Report continued to flag annuity misconduct as a priority area. These reports confirm that FINRA examiners are specifically looking for the same patterns your attorney would investigate in evaluating a potential claim.
Warning Signs You May Have a Claim
Not every variable annuity sale is misconduct. But the following patterns have repeatedly given rise to successful investor claims in FINRA arbitration and SEC proceedings:
- Your annuity was placed inside an IRA or 401(k). This is the most common red flag. If your broker did not identify — in writing — a specific benefit beyond tax deferral that justified the recommendation, the sale may have been unsuitable.
- You were not told about all the fees. If you were not given a clear explanation of M&E charges, subaccount expenses, administrative fees, rider costs, and surrender charges — and their combined impact — your broker may have violated Rule 2330’s disclosure requirements.
- You are elderly and the surrender period is long. A 7-to-10-year surrender schedule imposed on a retiree in their 70s or 80s is presumptively unsuitable absent compelling justification.
- Your broker recommended switching from one annuity to another. If you surrendered an existing annuity — triggering surrender charges — to buy a new one, and your broker cannot document why the new product was materially better, the exchange may have been churning.
- Your broker described the product as “safe,” “guaranteed,” or “protected.” These representations, if made without adequate qualification about market risk and the limits of contractual guarantees, may be actionable misrepresentations.
- Your account declined despite “guaranteed” features. Some investors do not realize until significant losses occur that the guarantee applies only to the benefit base used for withdrawals — not to the account value itself.
- A large percentage of your liquid assets went into the annuity. Concentration of a retiree’s investable assets in a single illiquid, high-fee product is a serious suitability concern.
These patterns are the same ones FINRA examiners, SEC enforcement staff, and experienced elder financial abuse attorneys look for when evaluating potential claims.
Your Legal Options: FINRA Arbitration
If you believe you were sold an unsuitable variable annuity, your primary avenue for recovery is FINRA arbitration — a private dispute-resolution process that is faster and less expensive than federal court litigation. Most brokerage account agreements require mandatory FINRA arbitration for disputes with the broker or firm. The typical statute of limitations is six years from the date of the event giving rise to the claim, although there may be shorter eligibility periods under FINRA’s Code of Arbitration Procedure.
In a successful FINRA arbitration, you may recover: compensatory damages representing the difference between what your money would have grown to in a suitable investment versus what actually happened; the surrender charges you paid; the excess fees you incurred; and in cases involving egregious conduct, additional damages. FINRA arbitration panels have awarded multi-million-dollar verdicts in variable annuity cases, including the $7.34 million award in Rosenau above.
Potential claims include: suitability violations under FINRA Rule 2111; violation of FINRA Rule 2330’s specific variable annuity procedures; failure to disclose material information; breach of fiduciary duty (applicable to investment advisers); Reg BI violations; churning (for excessive 1035 exchanges); and negligence and breach of fiduciary duty.
It is important to note that claims can be brought not only against the individual broker but also against the broker-dealer firm that employed them — particularly if the firm’s supervisory failures allowed the misconduct to occur or continue.
Contact an Experienced Investment Loss Attorney
If you believe you were sold a variable annuity that was not in your best interest — especially inside an IRA or other retirement account — we encourage you to contact us for a free, confidential consultation.
Call (866) 860-8507 today for a free consultation. There is no cost to discuss your situation and determine whether you have a claim worth pursuing. The sooner you act, the stronger your position—time limits on filing FINRA arbitration claims can work against investors who delay.
