Caveat Investor On These Annuities

YOU'VE HEARD THE SAYing, "All that glitters is not gold"? Well, variable annuities glitter. U.S. investors have already salted away more than $200 billion in these special mutual funds for one reason: earnings accrue tax-deferred. But the catch has always been that hefty fees can eat away at alluring returns.

Well, the SEC just made it a little harder for investors to tell the fool's gold from the real thing. In a new policy letter, the SEC said that vendors of variable annuities, or VAs, could redraw the charts they use in sales literature to show the advantages of tax deferral-without accounting for the fees; mention of those charges could be relegated to more formidable columns of text. The intent, says the SEC's Brenda Sneed, was to provide a "more meaningful" illustration of tax deferral.

But the benefits of staving off Uncle Sam are already clear to most investors. The fee structures of variable annuities are not. Annual insurance fees on VAs can hit 1.7 percent-on top of the regular mutual-fund charges. If you remove the extra fees from the chart, "of course it's going to look great," says Morning-star's Jennifer Strickland.

Even with the numbers clear, you should think twice. VAs are retirement vehicles for the well-heeled investor who has maxed out an IRA and 401(k). Best bet: Call T. Rowe Price (1-800-341-0790) for free software that can help you decide if, for you, VAs are golden.

Caveat Investor On These Annuities | News