Variable annuities vary significantly from mutual funds in that they impose various fees and charges, such as investment management fees, mortality and expense fees and contract maintenance charges.

Wrap fees may seem insignificant at first, but over time they can have a serious impact on your returns. Luckily, there are ways to limit these costs and lessen their impact.

1. Tax-Deferred Growth

Variable annuities offer you a tax-deferred means to build wealth – an advantage over mutual funds which must be converted to income in short order.

Variable annuities are long-term investment vehicles that typically feature various “share classes”, each with different initial sales loads/charges and ongoing fees. Speak to your financial professional about these differences, which could impact the potential return.

When investing in a variable annuity, your funds are placed into multiple market-linked subaccounts that fluctuate with market movements. These may include equity (stock) subaccounts managed by investment teams for growth or more conservative fixed income subaccounts designed to deliver stable returns over time. You may be able to move funds among these sub-accounts without incurring taxes – giving you flexibility over time in adjusting your allocation and changing it as necessary.

2. Guaranteed Living Benefits

Variable annuities offer features to lower the risk of clients outliving their retirement savings, such as guaranteed lifetime withdrawal benefit (GLWB) and living benefits, often called riders and may cost extra. For more information about these features, see Variable Annuities: What You Need to Know as well as any product prospectuses of variable annuities you are considering.

Educate clients on fees: Just like mutual funds, variable annuities have wrap fees that can significantly reduce investment returns. To educate clients about these fees and their impact on retirement savings plans. A 1% drag can decrease total value by 30% over 30 years!

3. Guaranteed Income in Retirement

Variable annuities have numerous features that can provide income in retirement, including guaranteed withdrawal benefits and lifelong income riders. Depending on your retirement needs and where you stand in life’s journey, these features may be attractive options to consider.

Variable annuities offer a diverse selection of investment options, such as stocks, bonds and fixed accounts. This diversified approach can reduce risk through diversification while potentially yielding greater returns over time as markets advance.

Variable annuities offer professional management that aims to maximize your investment potential and enhance returns through informed investing decisions, which is often an advantage over DIY investors, who may trade too frequently and make decisions driven by emotions rather than logic. Furthermore, most variable annuities provide an insurance component which guarantees at least some minimum death benefit coverage.

4. Tax-Free Withdrawals

Variable annuities allow you to take out an annual withdrawal, subject to income taxes.

Variable annuities typically utilize mutual fund investments that span market-based asset classes such as stocks, bonds and money market alternatives. Each mutual fund investment has different objectives, risks, fees and expenses that your financial professional can help explain in detail so you can select an investment option suitable to your risk profile and investment goals.

Before investing, it is essential that you carefully assess the investment objectives, fees and expenses associated with variable annuity investments as well as their underlying funds.