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Life Events :  Retirement

Variable Annuities

Variable Annuities: The Rest of the Story
by Michelle Wilbers

Variable annuities are contracts issued by insurance companies designed to provide retirement income. The owner may choose among several mutual fund investments (and sometimes fixed accounts as well) in which to invest annuity premiums. Variable annuities are attractive for long-term investments because the year-to-year increases in value from the investment gains are not taxable until withdrawn.

In 1996, approximately 80% of variable annuity sales were qualified accounts (such as IRAs). Some financial publications question why IRA monies go into variable annuities, since IRA funds are already tax-deferred and variable annuity fees are higher than mutual fund's fees. However, the articles usually fail to discuss some of the important differences between variable annuities and mutual funds:

Fees


According to Lipper Analytical Services, the average no-load domestic equity mutual fund annual fund expense is 1.26%. Since most variable annuities are sold through registered representatives, comparing a product that comes with an advisor to one which is sold direct to the public is not an accurate comparison. Most individuals who work with a registered representative perceive value in working with their advisor. In fact, studies have shown that investors who work with an advisor typically achieve greater investment results than those who go it alone.

No-load mutual funds can be purchased through a Registered Investment Advisor for a fee, which is usually about 1.00% annually of assets under management. Therefore, the total annual expense of a no-load domestic equity mutual fund sold through an advisor would be approximately 2.26%.

Of the types of mutual fund pricing structures sold through registered representatives, the one most like a variable annuity is the "B" share (end load). According to Lipper, the average domestic equity end load mutual fund has annual expenses of 2.04%.

Variable annuities sold through registered representatives have policy-based charges (mortality and expense, and administrative charges) of about 1.40% and fund level expenses for domestic equity portfolios of about 1.00%. Therefore, the total annual expenses are approximately 2.40%.



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