What impact do surrender charges and administration fees have on investors in variable annuities?

Surrender charges and administration fees associated with variable annuities are costs that can significantly diminish the value of an investor's account and overall return on investment. Surrender charges are penalties that investors must pay if they withdraw funds from the annuity before a certain period, typically referred to as the surrender period. These fees can reduce the net amount the investor receives.

Administration fees, on the other hand, are recurring charges that cover the costs of managing the variable annuity. These fees are deducted from the account value and can be based on a percentage of the assets or a flat fee. Both surrender charges and administration fees represent deductions from the account value, meaning they diminish the growth potential of the investment over time.

As a result, when these costs are factored in, they create a negative impact on the overall performance of the variable annuity, leading to reduced returns for investors. Therefore, the correct answer illustrates how these fees act as a drag on the investment, ultimately lowering both the account value and the returns that an investor might expect.