Mutual Funds and Annuities

—Which is Right for You?

As a §403(b)/IRA accountholder, you may choose to invest in mutual funds or annuities. In order to select the investment than can best help you achieve your goals, it is essential to understand the benefits and risks associated with each option.

Most fixed annuities are insurance products designed to guarantee a specific income for life. However, the amount you receive is usually set at a pre-determined rate, and over time, inflation can erode a fixed income’s purchasing power.

Variable annuities are also insurance products that can be used in a personal retirement program towards providing a solid foundation for your financial future. However, their returns, like that of mutual funds, will fluctuate with the financial markets. Variable annuities, which are offered by life insurance companies, offer a variety of benefits depending on the company of choice. For most variable annuities, you can choose from a full range of professionally managed investment portfolios. While a variable annuity may outpace inflation, variable annuity owners must contend with the financial markets’ inherent risk.

Annuities also charge mortality and expense fees to pay for a life insurance provision, resulting in less money available to accrue in your account. And, while the tax-deferred status of annuities can be attractive, annuities are often not the best choice for a §403(b)/IRA because retirement accounts already offer tax-deferral. On the positive side, annuity managers do not have to tax manage their portfolio in order to reduce capital gains distributions like their mutual fund counterparts.

Mutual funds are offered by companies that make investments on behalf of individuals and institutions who pool their funds to achieve a common financial objective. A mutual fund invests in the stocks, bonds and money market instruments issued by a variety of companies, institutions and/or government agencies. Investors share in the profits or losses of the fund’s investments. Thus, a mutual fund is a security whose performance is tied to the underlying investments. This means mutual fund investors must also contend with market risk.

With §403(b)/IRA mutual fund custodial accounts, investors have the opportunity to participate in the markets’ potential for growth on a tax-deferred basis. With this type of retirement account, you can retain control of your assets. At retirement, you may elect to receive a portion of your account each year, but the entire balance is always accessible should you need it. * And, the fees on a typical mutual fund are generally less than those charged on an annuity. As such, mutual funds may often be a better choice for §403(b)/IRA plan participants.