Variable annuities and mutual funds compared
Variable annuities and mutual funds are some of the most common investment vehicles for retirement savings. While both products contain a number of identical features that can make it challenging to distinguish between the two, variable annuities and mutual funds are actually quite different. Learn about the most important differences below.
|Variable annuities||Mutual funds*|
|Overview||Long-term investment products designed for retirement savings; they are essentially insurance contracts with an investment component.
||Investment products designed for any short-, intermediate- or long-term goal depending on the fund selected.|
|Charges||Products may have investment management fees; mortality and expense charges; charges for optional guarantee features; administrative, advisory or annual fees; or surrender or sales charges.
||Holders often incur transaction charges along with other fund operating costs, such as investment advisory fees, marketing distribution expenses, brokerage and custodial fees.|
|Tax-deferred accumulation||Yes, tax-deferred until withdrawn. Withdrawals are then taxed at ordinary income tax rates.
||No, dividends and distributed capital gains are taxed in the year they are received. Withdrawals are taxed at either the capital gains rate or ordinary income tax rates. Consult your tax professional for more information.|
|Tax-free transfers||Yes, tax-free transfers between subaccounts.||No, transfers between mutual funds may result in capital gain taxes.|
|Risks||Market volatility risk based on the investment options chosen.||Market volatility risk based on what the mutual fund invests in.|
|Death benefit||Basic death benefit available at no charge. Beneficiary receives greater of accumulated value or premiums paid (adjusted for withdrawals). Optional death benefits available for additional fee.
||No, beneficiary receives market value of the account at the time of the owner’s death.|
*Typically mutual funds provide greater liquidity and access to account values than annuities.
Annuities are often cited as being too expensive compared to traditional investments rather than considering costs relative to the benefits provided. The guarantees available with most variable annuities (for an additional cost) can help provide critical income protection for those who still want equity exposure in retirement. Compare the fees and expenses of variable annuities to mutual funds. Do you think it’s worth an additional 1.56% or so to protect retirement income?
|Average fund fee||M&E and Administration Fee1||Living benefit cost (single life)||Total cost|
|Lincoln ChoicePlus AssuranceSM B-Share variable annuity||0.95%||1.30%||1.05%||3.30%|
|B-share mutual fund average2||1.74%||NA||NA||1.74|
Source: Morningstar Direct, 2/2016
The purpose of this chart is to compare the fees and expenses of variable annuities to mutual funds. A full comparison would include sales charges, taxes, risks, features and benefits.
1B-share variable annuity and mutual fund fees do not include contingent deferred sales charges.
2Data includes all B-share open-ended mutual funds.