Web-only no-load variable annuity due soon

The Internet, which has reinvented the brokerage industry by driving down the price of trading stocks, is soon to take its toll on one of the most expensive investments for people preparing for retirement: variable annuities.

A Louisville, Ky., company called Web Wide Insurance, which booted up in December, is drawing plans to offer the first-ever no-load variable annuity exclusively sold online.

Brokerages, insurers and mutual funds are starting to use the Internet to drive down costs. New York online broker TD Waterhouse Group Inc. hooked up in January with AnnuityNet.com of Leesburg, Va., to create an annuity center for consumers, and eventually a site for independent financial advisers. Earlier, insurer Lincoln Financial Corp. and fund company Stein Roe & Farnham Inc. signed up with AnnuityNet.

Variable annuities, attractive for their tax-deferred status, have long been criticized for their high cost. The average expense ratio of a variable annuity is 2.15% of assets under management vs. 1.44% for mutual funds, according to Morningstar Inc. of Chicago.

“The annuity market today is where the mutual fund industry was in the early 1980’s,” when no-load funds took off and became commonplace, says Shane Chalke, president of AnnuityNet.com.

Many variable annuity companies are driving costs down by cutting out the middleman and selling them directly to investors. Such annuities make up only 5% of the $545 billion market now, but the Internet will spur an increase, insists Mr. Chalke.

Web Wide officials did not return calls, but a source familiar with the company says it will sell the investments online without loads and the usual mortality expenses or surrender charges and make its money on a cut of the management fees from the fund companies running the underlying portfolios.

The Internet is adding fuel to the low-price trend already set by no-load companies like T. Rowe Price Associates Inc., Charles Schwab Corp., Scudder Kemper Investments and Vanguard Group. Vanguard, which has lowered fees three times in as many years, sells its annuities for between 0.57% and 0.85% of assets, depending on the underlying investments.

Last year, New York pension manager TIAA-Cref’s life insurance unit began offering one of the cheapest annuities on the market — its Personal Select Annuity designed for do-it-yourself investors for as low as 0.37% of assets.

“Before people were stuck paying 200 basis points. Now there’s an escape hatch,” says Tom Pinto, a spokesman for TIAA-Cref. “We would think financial planners would have a fiduciary duty to inform clients of a low-cost VA option,” Mr. Pinto says.

Other insurers pooh-pooh the effect of the Internet, describing it as a way to sell cheap plain vanilla variable annuities only. Investors are also willing to pay for extra life insurance benefits, or long-term care riders, and the advice they get from a professional.

few bells, no whistles

“Low-cost products are providing a niche for those individuals that are cost conscious,” says Gene Muenchau, national vice president of variable annuities and mutual funds at Fortis Financial in St. Paul, Minn. “But many clients are still looking for those bells and whistles.”

“There’s a segment of the market that wants help,” insists Mark Steinberg, managing director of Allmerica Financial Corp. in Worcester, Mass. “Lots of people don’t want a stripped down version of whatever it is; they want the extra benefits and options.” And they understand they will be paying for it, he says.

Some industry professionals say the Internet is forcing companies to be competitive, which is a good thing for consumers. “I think what we have out there now is a large variety of products with different pricing and different features,” says Mark Mackey, president of the National Association of Variable Annuities, a trade group in Reston, Va.

More annuity companies are allowing investors to pick and choose exactly which options they want. “The consumer does have the choice to go with a product with more features or a bare-bones product that saves them fees,” Mr. Mackey says.