Author Topic: Difference between Variable Annuitys and Mutual Funds  (Read 1377 times)

DrumAllDay

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Difference between Variable Annuitys and Mutual Funds
« on: April 21, 2017, 12:49:50 PM »
The title says it all. I am confused at what the difference is between variable annuity's and mutual funds. In my 403(b) plan I have options of a few of each.

The variable annuity's I have chosen have smaller expense ratios and seem to track the whole stock market better than my mutual fund options but I am not sure what the actual difference is between them. Should I continue to mix and match? Should I stay away from one and not the other?

Thanks!

TheAnonOne

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #1 on: April 21, 2017, 12:58:46 PM »
An Annuity is really a product you buy similar to a pension. It pays you some guarenteed returns but generally are looked down on here.

I would be wary of buying annuities in general.

Mutual funds and index funds are simply collections of stocks. The lower the er and the broader the fund generally the better.

For instance VTSAX is probably the big one here.

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L.A.S.

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #2 on: April 21, 2017, 01:05:00 PM »
A mutual fund is an investment company that buys underlying assets e.g. stocks and bonds.  When you own shares of a mutual fund you own shares in the underlying assets by virtue of owning the fund.  The managers of the fund take a slice of the assets of the fund each year in the form of an expense ratio.  Index funds are run by computers to track an index so they usually have much lower fees than actively managed funds.

As far as I understand a variable annuity is an insurance wrapped product which you fund and then it allows you to invest in funds within the annuity.  Then at a later date, you "annuitize" what you have in there converting the variable annuity to a stream of guaranteed payments. Variable annuities products are varied enough that it is tough to give you a categorical answer, but in addition to fund expense ratios many of them have additional fees, and steep surrender charges that are not well disclosed -- the surrender charge would come into play if you decide you want your money back as a lump sum.  Although the fund inside the annuity may exhibit a reasonable expense ratio, this should not be interpreted to mean that they are low cost.  A word of advice: If you are talking to a variable annuity salesman there is an inherent conflict of interest and you are only ever going to get a sales pitch.  They will never admit that the product is not appropriate, since commissions for selling them are high.

To compare them, you'd have to know the total fee level of the VA and compare it to the fees of the mutual funds. 

Another thing to keep in mind, you do not need to buy a VA now if you are thinking at some point in the future you might like to have an annuity.  You can always take a portion of your tax deferred savings and buy a single premium immediate annuity (SPIA) as a pension supplement in the future when you need/want to.
« Last Edit: April 21, 2017, 02:28:34 PM by L.A.S. »

MDM

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #3 on: April 21, 2017, 01:50:20 PM »
The title says it all. I am confused at what the difference is between variable annuity's and mutual funds. In my 403(b) plan I have options of a few of each.
Who is the annuity provider in your plan?  If it is TIAA, you might be ok.  Search
      tiaa annuity site:bogleheads.org
for more information.

If it is not TIAA, the odds of the variable annuity being good, while not zero, are much lower.

DrumAllDay

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #4 on: April 21, 2017, 02:14:44 PM »
The title says it all. I am confused at what the difference is between variable annuity's and mutual funds. In my 403(b) plan I have options of a few of each.
Who is the annuity provider in your plan?  If it is TIAA, you might be ok.  Search
      tiaa annuity site:bogleheads.org
for more information.

If it is not TIAA, the odds of the variable annuity being good, while not zero, are much lower.

Yes it's TIAA. There are basically no index funds for me to choose so I initially thought that the two VAs I chose were my best bet in replicating one. But that was before I learned what an annuity is. Now I am trying to find out what my best course of action is. I will research that.

Mighty-Dollar

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #5 on: April 26, 2017, 03:46:07 AM »
Variable annuities are garbage. Stick with index funds. https://www.youtube.com/watch?v=ZulYOxPaoA8

pbkmaine

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #6 on: April 26, 2017, 05:35:09 AM »
Tell me what your TIAA options are. They are a different kind of variable annuity. Also tell me the expense ratios.

MustacheAndaHalf

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #7 on: April 26, 2017, 06:09:44 AM »
With an annuity your initial money is gone.  They pay you a percentage, but you never see the original money again.  With a mutual fund, you have both the gains and your invested money - you can withdraw your money from a mutual fund and get it back.

Car Jack

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #8 on: April 26, 2017, 07:44:51 AM »
This is like approaching a beautiful girl.  Either she's going to give you a nice kiss or kick you in the nuts.  The annuity will have you hunched over for a while.

pbkmaine

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Difference between Variable Annuitys and Mutual Funds
« Reply #9 on: April 26, 2017, 11:44:41 AM »
TIAA annuities are NOT like typical annuities. They are more like mutual funds. Their expense ratios tend to range from 10 to 50 basis points, and that includes annuity mortality and expense charges. The reason they are in annuity form is that TIAA has been around much longer than mutual funds, almost 100 years. Andrew Carnegie started the company to provide retirement benefits to teachers. It functions very much like a nonprofit.

TIAA's funds are conservatively managed, and can be almost index-like in performance. An exception is TIAA Real Estate, which gives ordinary investors access to the returns from top-tier commercial real estate. It is a unique fund, with low correlation to other asset categories, and if I had TIAA as my retirement plan provider, 10% of my assets would be in it. TIAA Traditional is another interesting fund. Its returns are based on the bonds, real estate and equities in TIAA's General Account, which is, IMHO, very well managed.

There are 2 reasons I have so much familiarity with the organization. The first is that I come from a family of teachers. The second is that I was head of the investment practice at one of the largest consultants to college and university defined contribution plans, and at one point in my career advised on $20 billion in TIAA assets. So if you have any questions, ask away.
« Last Edit: April 26, 2017, 11:53:13 AM by pbkmaine »

MDM

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #10 on: April 26, 2017, 01:10:54 PM »
TIAA annuities are NOT like typical annuities. They are more like mutual funds.
...
So if you have any questions, ask away.
Thanks for that post!  It's consistent with the general tone I've gleaned from various TIAA discussions at Bogleheads, etc.

Is there someplace one can go for specifics on how they are "more like" mutual funds?  E.g., does it depend on whether one chooses to annuitize or not, etc.?

DavidAnnArbor

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #11 on: April 26, 2017, 01:25:02 PM »
TIAA annuities are NOT like typical annuities. They are more like mutual funds. Their expense ratios tend to range from 10 to 50 basis points, and that includes annuity mortality and expense charges. The reason they are in annuity form is that TIAA has been around much longer than mutual funds, almost 100 years. Andrew Carnegie started the company to provide retirement benefits to teachers. It functions very much like a nonprofit.

TIAA's funds are conservatively managed, and can be almost index-like in performance. An exception is TIAA Real Estate, which gives ordinary investors access to the returns from top-tier commercial real estate. It is a unique fund, with low correlation to other asset categories, and if I had TIAA as my retirement plan provider, 10% of my assets would be in it. TIAA Traditional is another interesting fund. Its returns are based on the bonds, real estate and equities in TIAA's General Account, which is, IMHO, very well managed.

There are 2 reasons I have so much familiarity with the organization. The first is that I come from a family of teachers. The second is that I was head of the investment practice at one of the largest consultants to college and university defined contribution plans, and at one point in my career advised on $20 billion in TIAA assets. So if you have any questions, ask away.

This post deserves to be a wiki

MDM

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #12 on: April 26, 2017, 01:43:20 PM »
This post deserves to be a wiki
There is TIAA - Bogleheads.

Maybe that wiki contains all the information needed to answer my question about TIAA specifics.  Because we don't use TIAA and thus this is only academic for us, that may limit my incentive to glean that specific information from the non-pertinent info.  Anyway, at this point I'm left with the general impression that at least some "TIAA annuities are different from and better than" most annuities.  But I couldn't give specific advice on exactly how to navigate through all the TIAA choices - particularly when it comes to the accumulation/annuitization breakpoint.

DrumAllDay

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #13 on: April 26, 2017, 02:05:55 PM »
Tell me what your TIAA options are. They are a different kind of variable annuity. Also tell me the expense ratios.

I am currently allocating most of my contributions to CREF Equity Index Account (R2) QCEQPX. The other VAs I have money in are CREF Global Equities Account (R2) QCGLPX, and CREF Growth Account (R2) QCGRPX. They have expense ratios of 0.37%, 0.48%, and 0.42%.

I am also contributing to a few mutual funds: a large cap value fund, a mid cap value fund, and a small cap blend index fund. The only true index fund that I have access to with a really low expense ratio is the small cap index fund.

The reason I am allocating 65% of my contributions to the VAs are that I feel like they have the best combination of lowish expense ratios and of covering the whole market. I have not seen anything on how these funds are different than TIAA's mutual funds other than them actually calling them variable annuities. I just want to make sure I am not locking my money into some fixed rate of return that is in the fine print somewhere.

pbkmaine

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Difference between Variable Annuitys and Mutual Funds
« Reply #14 on: April 26, 2017, 03:43:20 PM »
The Equity Index Account is a Russell 3000 index, basically the entire US stock market. It is absolutely a "true index". You do not need ANY other US equity holdings - this does it. The only reason to hold anything else is if some of your other options are cheaper. With indexing, of course, cheaper is better. CREF Global Equities sounds like it holds foreign stocks, doesn't it? The trick, though, is the word "Global". This fund is actually 60% US, 40% foreign. Do you have a pure foreign option in your plan? If so, what is it?

You might also wish to consider holding some money in TIAA Real Estate, TIAA Traditional and a bond fund. It does not have to be a lot. Owning more than one type of asset category tends to give you more return for less risk (as measured by standard deviation) over time. This concept is called Modern Portfolio Theory or mean variance analysis and won the Nobel Prize in Economics in 1990 for its originators: Harry Markowitz, Merton Miller and Bill Sharpe.

My recommendation is to schedule time with a TIAA counselor, whether over the phone or in person, and have them do an asset allocation for you. You do not want them to manage your assets - it's an extra fee. You just want them to give you suggested percentages, which you can tweak until you feel comfortable. Or you may have target date funds available. Each target date fund is a well-diversified portfolio in and of itself. Fix it and forget it.

As someone mentioned above, the TIAA annuity funds have an extra added kicker. For lack of a better way of describing it, you can build up extra points (they don't call it "points" but that's the idea) if you have your money in the annuities for a long time. That's something you can go over with your TIAA counselor. You can easily convert the annuity funds into a stream of income upon retirement, should you choose to do so.
« Last Edit: April 26, 2017, 03:45:49 PM by pbkmaine »

DrumAllDay

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #15 on: April 27, 2017, 10:24:35 AM »
I also have access to TIAA-CREF International Equity Fund (Premier)1 TREPX. Looking deeper into it I see that this fund is truly international compared to the global fund. I overlooked it because it didnt seem like it was as good of a fund.

I think I will schedule something with the TIAA rep to explain some of this for me. I have access to target date funds too but I wanted to create my own mix that was suitable to my own liking.

So just making sure, you are saying the TIAA Variable Annuities give me the option of either cashing in for a fixed income (like a typical annuity) or selling shares like a typical mutual/index fund? I still own those shares until I decide what I want to do with them?

Thanks for your help!

DrumAllDay

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Re: Difference between Variable Annuitys and Mutual Funds
« Reply #16 on: April 27, 2017, 10:59:12 AM »
I found the info I was looking for on TIAAs website! https://www.tiaa.org/public/offer/products/annuities/retirement-plan-annuities


This helped clear what exactly their Variable annuities are and what you can do with them. As well as explain their TIAA traditional and real estate accounts which as mentioned before, seem very solid. Again, thanks for the help.

pbkmaine

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Difference between Variable Annuitys and Mutual Funds
« Reply #17 on: April 27, 2017, 12:14:20 PM »
I also have access to TIAA-CREF International Equity Fund (Premier)1 TREPX. Looking deeper into it I see that this fund is truly international compared to the global fund. I overlooked it because it didnt seem like it was as good of a fund.

I think I will schedule something with the TIAA rep to explain some of this for me. I have access to target date funds too but I wanted to create my own mix that was suitable to my own liking.

So just making sure, you are saying the TIAA Variable Annuities give me the option of either cashing in for a fixed income (like a typical annuity) or selling shares like a typical mutual/index fund? I still own those shares until I decide what I want to do with them?

Thanks for your help!

The International Equity fund doesn't look as good to you because US equities have outperformed foreign ones over the past few years. That trend is unlikely to continue indefinitely.

The best thing you can do right now is schedule an appointment with a TIAA-CREF person and prepare a list of questions.
« Last Edit: April 27, 2017, 12:26:57 PM by pbkmaine »