Variable annuities can be complicated enough before you even start looking at the investments inside them. Contract fees, surrender charges, income riders, and insurance guarantees usually get most of the attention.
But another cost quietly influences performance every year: subaccount expenses. Variable annuity subaccounts typically invest in underlying funds, and those funds have their own operating expenses.
These costs are generally deducted within the underlying portfolio, meaning investors do not receive a separate bill. Instead, they show up indirectly through lower investment returns.
That is why subaccount expenses matter in variable annuity comparisons. Two contracts can have similar insurance charges while producing very different net results because their available investment options have different expense ratios.
The difference may look tiny on paper. Yet over 10, 20, or 30 years, recurring investment costs can significantly affect compounding.
Understanding these expenses helps investors compare variable annuities based on what they are likely to keep rather than simply what the underlying portfolios earn before fees.
What Are Subaccount Expenses?
A variable annuity normally allows the owner to allocate money among different investment options called subaccounts.
Each subaccount generally invests in an underlying fund. Depending on the contract, those funds might focus on U.S. stocks, international equities, bonds, balanced portfolios, money-market securities, or specialized investment strategies.
The underlying funds have operating expenses.
Investor.gov explains that variable annuity owners indirectly pay the fees and expenses of the mutual funds selected as investment options. Importantly, those expenses are separate from fees charged directly by the insurance company.
Fund expenses can include investment management fees, service expenses, distribution charges, and other operating costs.
You usually will not see these costs deducted from the annuity as a separate dollar transaction.
Instead, the fund deducts them from its assets, which lowers the investment return ultimately reflected in the subaccount.
Expense Ratios Directly Affect Net Investment Performance
Imagine two subaccounts following broadly similar investment strategies.
Subaccount A has underlying annual fund expenses of 0.30%, while Subaccount B costs 1.10%.
Suppose both underlying portfolios earn 7% before expenses in a particular year. Ignoring all other annuity charges, the lower-cost option leaves more of that investment performance working for the investor.
The gap may not feel dramatic after one year.
Over several decades, however, recurring costs compound in reverse.
For example, $100,000 growing at a hypothetical net 6.7% annually would reach roughly $508,000 after 25 years. At 5.9%, the ending value would be around $419,000.
That is an approximate $89,000 difference created by only 0.8 percentage point of annual return.
Real market returns will vary, of course, but the basic principle is important: every recurring expence increases the performance hurdle the investment must overcome.
Fund Expenses Can Vary Dramatically Within One Annuity
Investors should not assume every investment option inside the same annuity has approximately the same cost.
Recent SEC prospectuses show surprisingly wide ranges.
For example, one variable annuity prospectus filed in 2026 disclosed gross annual underlying fund expenses ranging from 0.09% to 5.82%. After contractual waivers or reimbursements, the range was 0.09% to 5.67%.
Another 2026 filing showed underlying fund expenses ranging from 0.46% to 3.38%, with net expenses ranging from 0.46% to 3.19%.
These examples should not be interpreted as typical costs for every annuity or every fund. They simply demonstrate how widely investment expenses can differ within real contracts.
The lesson is practical.
Do not evaluate only the annuity’s base contract fee. Review the expense ratio of the specific investment options you actually intend to use.
Gross Expense Ratios and Net Expenses Are Not Always the Same
Another detail worth checking is whether the prospectus shows both gross and net fund expenses.
Gross expenses represent the fund’s operating costs before certain temporary fee waivers or reimbursements.
Net expenses reflect those arrangements while they remain in effect.
The difference can matter.
One 2026 SEC filing, for example, reported gross underlying fund expenses as high as 8.91%, while net expenses after reimbursement topped out at 1.24%. The filing also stated that certain reimbursement arrangements were expected to continue through at least April 30, 2027.
That is a huge difference.
An investor looking only at the current net expense ratio might assume the cost is permanent. It may not be.
When comparing subaccounts, check how long expense waivers are contractually scheduled to remain in place and what costs could look like afterward.
A low temporary expense ratio is not necessarily the same thing as a permanently low-cost investment.
Subaccount Fees Stack on Top of Contract Expenses
Variable annuity investors do not pay only fund expenses.
Investor.gov identifies several potential cost categories, including base contract or mortality and expense charges, administrative fees, surrender charges, underlying fund costs, and expenses for optional insurance features.
This creates a layered fee structure.
Imagine a hypothetical annuity with:
a 1.10% base insurance charge, 0.15% administrative expenses, 0.75% underlying fund expenses, and a 1.00% lifetime-income rider.
The combined annual cost could approach 3%, depending on how each fee is calculated.
Looking only at the 0.75% investment expense would badly underestimate the true cost of owning the contract.
The opposite mistake is also possible.
Someone may see a relatively high base annuity charge but overlook that the available subaccounts are unusually inexpensive.
The most useful comparison therefore looks at the entire cost stack rather than any single fee.
Cheap Subaccounts Are Not Automatically Better Investments
Expense ratios matter, but cost should never become the only selection criterion.
A 0.20% fund is not necessarily better than a 0.60% fund simply because it is cheaper.
The underlying portfolios may have completely different objectives.
One might track a broad-market index, while another uses active management, specialized securities, hedging techniques, or a multi-asset strategy.
The better question is whether the additional cost delivers something useful.
For a broad U.S. equity allocation, paying substantially more for a fund that behaves almost identically to a cheaper alternative deserves scrutiny.
But specialized investment strategies may reasonably cost more to operate.
Compare expenses among investments that perform similar jobs inside the portfolio.
A low-cost international bond fund should not be compared directly with a specialized emerging-markets equity strategy simply because both appear on the same annuity menu.
Portfolio Construction Determines the Expenses You Actually Pay
A prospectus may show dozens or even hundreds of available investment options, but investors pay indirectly only for the ones they actually own.
That means portfolio construction matters.
Suppose an annuity offers one broad equity subaccount costing 0.25% and several specialized funds costing more than 1%.
An investor allocating heavily to the inexpensive option may experience a much lower weighted-average fund expense than someone choosing several expensive strategies.
You can estimate this fairly easily.
If 70% of the portfolio is invested in a fund costing 0.30% and 30% is allocated to a fund costing 1.00%, the weighted fund expense is approximately 0.51%.
That number provides a more realistic picture than simply looking at either fund individually.
This type of calculation can make annuity comparision much more meaningful.
Investment Restrictions Can Affect Your Ability to Lower Costs
Some variable annuities provide guaranteed living benefits that restrict investment choices.
An insurer might require investors using a particular income rider to select from designated asset-allocation portfolios or volatility-managed funds.
That can affect subaccount expenses.
If the lowest-cost investments in the contract are unavailable under the rider, the investor may indirectly pay more for the permitted portfolio.
This does not automatically make the rider unattractive.
Investment restrictions can help insurers manage the financial risk of providing lifetime guarantees, and the guaranteed income itself may have meaningful value.
Still, cost analysis should include the funds that the investor will actually be permitted to use.
There is little value in advertising a 0.20% investment option if your selected retirement-income feature requires a completely different portfolio costing considerably more.
Higher Expenses Become More Important Over Long Holding Periods
Variable annuities are typically designed as long-term financial products.
That makes recurring investment expenses especially important.
Consider two comparable portfolios differing in annual costs by 0.50%.
On $300,000, that represents approximately $1,500 during the first year alone, assuming the fee percentage applies to that account value.
But the long-term cost is greater than $1,500 multiplied by the number of years.
Account values change, and every dollar removed through fees is also a dollar that cannot produce future investment returns.
This is why relatively small differences can become substantial over a 20- or 30-year retirment horizon.
Recent SEC variable annuity prospectuses even provide standardized hypothetical cost examples specifically to help investors compare the cost of investing through different subaccounts and annuity contracts.
Those examples can be useful starting points, although your actual allocation and returns will differ.
Compare What You Keep, Not Just What a Fund Earns
Performance tables can easily draw attention toward whichever subaccount produced the best historical return.
But historical performance by itself tells only part of the story.
Investors should consider returns after investment expenses and then place those results within the annuity’s broader fee structure.
Suppose Fund A generated slightly higher gross returns than Fund B but consistently charged considerably more.
If the additional return does not compensate for the higher expense, the investor may be better off with the cheaper alternative.
Expense ratios are also more predictable than investment returns.
Nobody knows which stock fund will outperform during the next decade. But the costs disclosed in the prospectus provide a much clearer idea of how much return will be lost to expenses under current terms.
That makes fees one of the few investment variables investors can evaluate with reasonable certainty.
Subaccount expenses can have a surprisingly large influence on variable annuity performance because they reduce investment returns year after year.
Over a long holding period, even modest differences in expense ratios can translate into meaningful differences in account value and future retirement income.
The challenge is that these investment costs sit on top of other potential annuity expenses, including base contract fees, administrative charges, surrender costs, and optional riders.
Before choosing an annuity, review the expense ratios of the subaccounts you are actually likely to use. Compare gross and net expenses, check whether fee waivers are temporary, calculate your approximate weighted portfolio cost, and then add the contract’s other charges.
The best comparison is not about finding the cheapest fund at any cost. It is about building the investment strategy you need while avoiding fees that provide little additional value.
